PLAN

Critically evaluate and compare the absolute priority rule under the US Bankruptcy
Code (11 USC §1129(b)) and the conditions for a cross-class cram-down of the
restructuring plan pursuant to Companies Act 2006, Pt. 26A, sec. 901G

Introduction

The development of the bankruptcy law in the United States has been a result of extensive
deliberation and jurisprudence by the lawmakers. One key component of this law is the
Absolute Priority rule, which determines the order of priority for the recovery of loans
during a company's bankruptcy. This principle guides the allocation of assets and liabilities in
a bankruptcy proceeding. And another of this aspect is Cross-class cram down rule. The
cross-class cram-down principle is a legal mechanism that allows a bankruptcy court to
approve a reorganization plan, even if some classes of creditors or shareholders reject it.
This principle provides a way for the court to resolve disagreements between different
classes of stakeholders and facilitate the reorganization process.

What is Absolute Priority rule and why is it important

The Absolute Priority rule is an essential aspect of the bankruptcy law, which seeks to
provide a fair and orderly resolution to insolvency cases while ensuring equitable treatment
of all parties involved. This rule can be found in the US Bankruptcy Code 1. This rule is
intended to make sure that secured creditors who have a legally recognized interest in
certain assets are given priority over unsecured creditors who do not have a similar interest.

Under this rule, in order for a reorganization plan to be confirmed, secured creditors must
be paid in full before unsecured creditors can receive any payment. This implies that if the
available assets are insufficient to satisfy all the secured creditors completely, unsecured
creditors will not receive any payment until secured creditors are fully paid. The rule applies
to all forms of bankruptcy proceedings, including Chapter 7 liquidation, Chapter 11
reorganization, and Chapter 13 individual debt adjustment.

The absolute priority rule ensures a fair and orderly distribution of assets to creditors. Its
purpose is to provide a clear hierarchy of payment priority for creditors, which helps to
protect the rights of secured creditors and prevent unsecured creditors from receiving
preferential treatment. The rule requires that secured creditors must be paid in full before
any payment is made to unsecured creditors, regardless of the size of their claims or the
amount of assets available for distribution. By upholding this principle, the absolute priority
rule promotes transparency and predictability in bankruptcy proceedings, which is essential
for maintaining confidence in the bankruptcy system and facilitating the successful
reorganization of financially distressed entities.

The Supreme Court's decision in Czyzewski v. Jevic 2 Holding Corp. established that a
bankruptcy court cannot approve payments to lower-priority claimants in a structured

1
US Bankruptcy Code, 11 USC §1129(b)
2
Czyzewski v. Jevic, (2017) 137 S. Ct. 973
dismissal without the consent of higher-priority creditors. This upholds the Bankruptcy
Code's priority system, which ensures that creditors are paid in the order of their priority.

There are several exceptions to this rules where an unsecured creditor may get priority over
a secured creditor. An unsecured creditor can get priority over the secured creditors if he
agrees to accept less than full payment in exchange for equity in the reorganized company.
The courts, in these cases, must consider the interests of all creditors as well as the viability
of the plan.

According to Robert M. Lawless, an expert on Bankruptcy law, the principle of absolute

priority rule is vital to maintaining fairness and balance between secured and unsecured
creditors in the bankruptcy process. This Principle ensures that secured creditors are given
priority and are paid in line with their legal rights, increasing the efficiency of the bankruptcy
proceedings and distribution of asset value simultaneously. Lawless emphasizes the
importance of this rule in protecting the interests of all parties involved in the bankruptcy
process.3

Similarly author Michelle J. White argues that the absolute priority rule is a critical
component of the bankruptcy process, and provides a valuable framework for ensuring that
the interests of secured creditors and unsecured creditors are balanced. White notes that
the rule provides a clear and straightforward approach to the distribution of assets and
liabilities in a bankruptcy case, and helps to ensure that the bankruptcy process is fair and
equitable for all parties involved.4

Apart from scholarly articles, the absolute priority rule has been a topic of discussion in
several court cases, including the notable Northern Pipeline Construction Co. v. Marathon
Pipe Line Co5. In this instance, the Supreme Court affirmed that the absolute priority rule is a
crucial principle of bankruptcy law. It ensures a fair distribution of assets and upholds a
balance between the rights of secured and unsecured creditors. The ruling highlighted the
significance of this rule in promoting fairness and equity in the bankruptcy process.

The United States v. Ron Pair Enterprises, Inc. 6 is another significant legal precedent that
established the scope of the absolute priority rule in bankruptcy cases. The case tackled the
question of whether the rule applies to all bankruptcy cases or is limited to certain types.
The Supreme Court ruled that the absolute priority rule applies to all bankruptcy cases,
including Chapter 7 liquidation, Chapter 11 reorganization, and Chapter 13 individual debt
adjustment. The decision in this case has been widely recognized as a crucial authority on
the extent of the absolute priority rule and has contributed to a clearer understanding of the
rule's applicability in various bankruptcy proceedings.

In addition to these cases, there are also a number of common laws that are relevant to the
absolute priority rule. For example, the Uniform Commercial Code (UCC), which governs the
sale of goods, provides rules for the prioritization of claims in the event of a bankruptcy. The
UCC recognizes the priority of secured creditors, and provides guidance on the order in
which creditors should be paid in the event of a bankruptcy.

3
Robert M. Lawless. “The Absolute Priority Rule is Not Dead, It Is Essential”. (2016). Harvard Journal of Law &
Public Policy, 39(1),23-49. accessed 20/02/2023
4
Michelle J.White . “Bankruptcy Law: Has It’s Time Passed?”. Stanford Law Review. (2007). 60(3), 553-623
5
Construction Co. v. Marathon Pipe Line Co., (1982) 458 U.S. 50
6
United States v. Ron Pair Enterprises, Inc., (1989) 489 U.S. 235
Overall, the absolute priority rule has been the subject of extensive discussion and analysis
in the legal and academic communities, and is widely recognized as a critical component of
the US bankruptcy system. The rule provides a clear and straightforward framework for the
distribution of assets and liabilities in a bankruptcy case, and helps to ensure that the
bankruptcy process is fair and equitable for all parties involved. The absolute priority rule is
a crucial principle in the US bankruptcy process that ensures that creditors and stakeholders
are treated fairly in the event of a bankruptcy filing.

Currently, the rule has two specific uses: one for individuals or groups who possess claims or
equity interests in a category that opposed a chapter 11 cram down plan, and another for a
chapter 7 liquidation scenario.7

What is Cross-Class Cram Down Principle and why is it important?

In the context of a restructuring plan, the implementation of a cross-class cram-down is

governed by section 901G of Part 26A of the Companies Act 2006. This provision outlines the
conditions that must be satisfied for a restructuring plan to be confirmed, despite the
disagreement of some creditors with the proposed plan.

In the United States, the cross-class cram-down principle is a legal mechanism available in
Chapter 11 bankruptcy cases under the Bankruptcy Code. It allows a bankruptcy court to
approve a proposed reorganization plan even if it is not approved by every class of creditors
or shareholders.

Under the cross-class cram-down principle, a reorganization plan can be confirmed if at least
one impaired class of creditors or shareholders votes in favor of the plan, and if the plan
does not discriminate unfairly against any dissenting class. This means that if the plan is fair
and equitable to all parties involved, it can be confirmed by the court, even if some creditors
or shareholders disagree with it.

The cross-class cram-down principle is intended to facilitate the restructuring of a company's

debts and assets, and to provide a way for the company to emerge from bankruptcy as a
viable entity. However, it can be a complex and controversial process, and it requires careful
consideration of the interests of all parties involved.

Two prominent authors have published papers on the cross-class cram-down provisions.
Paul Omar argues that these provisions offer valuable assistance for companies facing
financial difficulties. These provisions enable the implementation of a restructuring plan
even if one or more classes of creditors oppose it. Additionally, they promote fairness and
equity in the distribution of the company's assets and liabilities during the insolvency
process.8

Peter Walton also argues in favor of the cross-class cram-down provisions as an alternative
to liquidation in the event of a company's insolvency. According to Walton, these provisions
help maintain the company's value for the benefit of its stakeholders and creditors. By
enabling the implementation of a restructuring plan in the face of opposition from one or

7
Bruce Grohsgal. ”How Absolute Is the Absolute Priority Rule in Bankruptcy? The Case for Structured Dismissals”.
2017. volume 8. Issues 3. 458. William & Mary business Law Review. accessed 18/02/2023 4:30 P.M.
8
Paul Omar, “The New Cross-Class Cram-Down in the UK: An Overview of the Provisions of the Companies Act
2006”. 2010. Journal of Corporate Law Studies 127
more creditor classes, these provisions ensure that the distribution of assets and liabilities is
consistent with the interests of all parties involved.9

In order to confirm a restructuring plan using the cross-class cram-down mechanism under
the Companies Act, certain conditions must be met. Firstly, the plan must receive approval
from a majority of creditors in each separate class, meaning that even if one class votes
against the plan, it can still be confirmed if another class has approved it. Secondly, the plan
must provide fair and equitable treatment to all creditors without unfairly discriminating
against any particular class. Finally, the restructuring plan must be feasible and likely to
succeed in order to be confirmed, ensuring a realistic path to recovery for the company.

These conditions serve to ensure that a restructuring plan is in the best interests of all
creditors and the company, and that it is structured in a manner that is fair and equitable to
all parties involved. In considering whether to confirm a restructuring plan, the court must
weigh the interests of all creditors, the feasibility of the plan, and any other relevant factors.

The provisions for cross-class cram-down offer a structured approach for implementing a
restructuring plan in the event of a company's insolvency. These provisions permit the court
to approve a restructuring plan, even if one or more groups of creditors oppose it, given that
specific conditions are fulfilled.

For a debtor to be eligible for cross-class cram-down, they must be in Chapter 11

bankruptcy, which is a type of bankruptcy that allows the debtor to restructure their
business while continuing to operate. The reorganization plan must be equitable and fair,
ensuring that the creditors receive the same or better treatment than they would receive in
a Chapter 7 liquidation. At least one impaired class of creditors must vote to accept the plan,
which means that the plan modifies the legal, equitable, or contractual rights of that class.
Discrimination against any class of creditors is not permitted, and the plan must be feasible,
which means that it is capable of being implemented without the debtor's liquidation or
reorganization failing. Cross-class cram-down is an effective mechanism to allow debtors to
implement reorganization plans despite creditor opposition, and it can be a vital tool in a
Chapter 11 bankruptcy.

Critical analysis of these 2 principles.

Both the absolute priority rule in the US Bankruptcy Code and the cross-class cram-down
provisions in the Companies Act 2006 serve to govern the distribution of assets and liabilities
in bankruptcy proceedings. However, there are significant differences between the two
provisions that are important to consider when evaluating and comparing them.

The absolute priority rule in the US Bankruptcy Code mandates that secured creditors must
be paid in full before unsecured creditors can receive any distribution in order for a
reorganization plan to be confirmed. This means that unsecured creditors will not receive
any payment until secured creditors have been fully paid if there are insufficient assets to
pay all creditors in full.

Conversely, the cross-class cram-down provisions in the Companies Act 2006 allow for the
confirmation of a restructuring plan even if not all creditors agree to the plan. Specifically,
Section 901G permits the confirmation of a restructuring plan if it has been approved by a

9
Peter Walton. “The Cross-Class Cram-Down: An Alternative to Liquidation under the UK Companies Act 2006”
(2012). Journal of Business Law 416
majority of creditors in each separate class of creditors, even if another class of creditors has
opposed the plan. This allows for the confirmation of a plan despite some creditors being
dissatisfied with the distribution of assets and liabilities.

Comparision between these two Principles

In comparing these two provisions, it can be observed that the absolute priority rule in the
US Bankruptcy Code is more stringent in its standard for the confirmation of a reorganization
plan, as all secured creditors must be paid in full before any distribution to unsecured
creditors can occur. On the other hand, the cross-class cram-down provisions in the
Companies Act 2006 offer more flexibility, as they allow for the confirmation of a
restructuring plan despite opposition from some creditors.

Ultimately, the appropriate provision to utilize in a given bankruptcy case will depend on the
specific circumstances and the priorities of the parties involved. It is critical to consider the
interests of all creditors and the feasibility of the restructuring plan when determining which
provision is most suitable.

The absolute priority rule and cross-class cram-down provisions are two key provisions that
regulate the distribution of assets and liabilities in bankruptcy proceedings in the US and the
UK. The US Bankruptcy Code's absolute priority rule, found in 11 USC §1129(b), requires
secured creditors to be paid in full before unsecured creditors can receive any distribution.
In contrast, the cross-class cram-down provisions under the Companies Act 2006, Pt. 26A,
sec. 901G, allows for a restructuring plan to be confirmed if it has been approved by a
majority of creditors in each separate class, even if not all creditors agree to the plan.

The concepts of the absolute priority rule and cross-class cram-down provisions are well-
established in the field of corporate finance and insolvency law. These ideas are discussed in
numerous academic and legal works, such as Gullifer and Payne's "Corporate Finance Law:
Principles and Policy,"10 which provides an overview of the principles and policies underlying
corporate finance law. The book emphasizes the role of insolvency law in protecting the
interests of creditors and other stakeholders.

In "Corporate Insolvency Law in the Twenty-First Century: State Imposed or Market

Based?"11 Michael Schillig discusses the need for market-based solutions to the challenges
posed by insolvency. He argues that a flexible and adaptive approach to insolvency law is
necessary to respond to changing market conditions while preserving the interests of
creditors and other stakeholders.

Royston Goode's "Principles of Corporate Insolvency Law" 12 provides a comprehensive

overview of the principles of corporate insolvency law. The book covers the role of the
courts, the rights and obligations of creditors in the insolvency process, and the importance
of promoting fairness and equity in insolvency law. The book highlights the role of the
absolute priority rule and other provisions in achieving these goals.

The absolute priority rule is a long-standing principle in US bankruptcy law and is designed to
protect the interests of secured creditors. The rule ensures that secured creditors are paid in
10
Gullifer, Louise, and Jennifer Payne.”Corporate finance law: principles and policy”. 2015,
Bloomsbury Publishing.
11
Michael Shilling. "Corporate insolvency law in the twenty-first century: state imposed or market based?.".
2014. 14.1. Journal of Corporate Law Studies.
12
Royston M. Goode. “Principles of corporate insolvency law”. 2011. Sweet & Maxwell,.
full before unsecured creditors receive any distribution, which means that unsecured
creditors may not receive any payment if there are not enough assets to pay all creditors in
full. The rule has been criticized for being overly harsh on unsecured creditors, particularly
small businesses, who may be left with nothing in a bankruptcy proceeding. In addition, the
absolute priority rule has been subject to interpretation, and the US Supreme Court has
issued several rulings that have altered the application of the rule in bankruptcy
proceedings.

In contrast, the cross-class cram-down provisions under the Companies Act 2006 are
relatively new, having been introduced in 2020. The provisions allow for a restructuring plan
to be confirmed even if not all creditors agree to it. The plan will be confirmed as long as it
has been approved by a majority of creditors in each separate class, which provides more
flexibility than the absolute priority rule. This can lead to a more efficient bankruptcy
process, as it reduces the need for lengthy negotiations between creditors.

While the cross-class cram-down provisions offer more flexibility, they have been criticized
for potentially undermining the interests of creditors who do not agree with the
restructuring plan. This could result in an unfair distribution of assets and liabilities, as the
plan may be confirmed even if some creditors are not satisfied with the terms. In addition,
the provisions have been subject to interpretation, and it remains to be seen how they will
be applied in practice.

Ultimately, the choice between the absolute priority rule and cross-class cram-down
provisions will depend on the specific circumstances of each case and the priorities of the
parties involved. The absolute priority rule provides a more stringent standard for
confirmation of a reorganization plan, as all secured creditors must be paid in full before
unsecured creditors can receive anything. The rule ensures the protection of the interests of
secured creditors and may be appropriate in cases where the interests of secured creditors
are significant. The cross-class cram-down provisions, on the other hand, provide more
flexibility and may be appropriate in cases where the interests of unsecured creditors are
significant or where a more efficient bankruptcy process is desired.

Conclusion

The absolute priority rule and cross-class cram-down provisions are two key provisions that
regulate the distribution of assets and liabilities in bankruptcy proceedings. While both have
their advantages and disadvantages, the choice between the two will depend on the specific
circumstances of each case and the priorities of the parties involved. It is important to
consider the interests of all creditors and the feasibility of the restructuring plan when
determining which provision is most appropriate. Additionally, it is important to note that
the interpretation of these provisions may evolve as new cases arise and legal principles are
tested in practice
BIBLIOGRAPHY

WEB

1. D. Michael Lynn. The Toolbox: Cramdown and the Absolute Priority Rule Under Section
1129(b). 2015. Bloomberg Law.

https://news.bloomberglaw.com/bankruptcy-law/the-toolbox-cramdown-and-the-absolute-
priority-rule-under-section-1129-b

BOOK

1. Gullifer, Louise, and Jennifer Payne.”Corporate finance law: principles and policy”. 2015,
Bloomsbury Publishing.

2. Michael Shilling. "Corporate insolvency law in the twenty-first century: state imposed or
market based?.". 2014. 14.1. Journal of Corporate Law Studies.

3. Royston M. Goode. “Principles of corporate insolvency law”. 2011. Sweet & Maxwell,

RESEARCH PAPERS

1. Bruce Grohsgal. ”How Absolute Is the Absolute Priority Rule in Bankruptcy? The Case for
Structured Dismissals”. 2017. volume 8. Issues 3. 458. William & Mary business Law Review.
accessed 18/02/2023 4:30 P.M.

2. Michelle J.White . “Bankruptcy Law: Has It’s Time Passed?”. Stanford Law Review. (2007).
60(3), 553-623

3. Paul Omar, “The New Cross-Class Cram-Down in the UK: An Overview of the Provisions of
the Companies Act 2006”. 2010. Journal of Corporate Law Studies 127

4. Peter Walton. “The Cross-Class Cram-Down: An Alternative to Liquidation under the UK

Companies Act 2006” (2012). Journal of Business Law 416

5. Robert M. Lawless. “The Absolute Priority Rule is Not Dead, It Is Essential”. (2016).
Harvard Journal of Law & Public Policy, 39(1),23-49. accessed 20/02/2023