Meaning
Statutory confirmation standards embedded within bankruptcy reorganization law evaluate whether a proposed plan treats non-consenting impaired classes according to legally required priority rules. The fair and equitable test governs crammed down bankruptcy plans to ensure senior creditors receive full recovery before junior classes receive or retain any corporate property. The standard enforces the absolute priority rule unless affected classes consent to alternative distributions.
It determines whether a reorganization plan can be forcibly confirmed over class objections.
Absolute Priority
Enforcing class priority prohibits equity owners from retaining equity value unless senior creditors receive full satisfaction of their legal claims. Under the fair and equitable test, senior debt holders must be paid in full before junior claim holders or original equity participants retain ownership interests in the reorganized entity. Courts evaluate projected cash flows and enterprise valuations to verify compliance with statutory distribution rules.
Reorganization plans failing this evaluation cannot overcome class rejections.
Creditor Protection
Legal priority rules safeguard dissenting creditors against improper equity retention by former owners. Through the fair and equitable test, bankruptcy courts evaluate whether plan payments provide dissenting claim holders with present value equal to allowed claim amounts. Secured claim holders must retain liens or receive cash payments equal to secured collateral value.
Plan Confirmation
Meeting statutory distribution standards enables corporate debtors to confirm reorganization plans despite creditor opposition. Under the fair and equitable test, judicial confirmation binds all claim holders to restructured payment schedules. Verified plan compliance eliminates legal challenges from non-consenting security holders.
