Explanation

Absolute priority doctrine states that the creditors should be paid in the hierarchical order. This means that junior creditors are paid only when the senior creditors are paid in full. Moreover, if the estimates suggest that senior creditors were to suffer losses from the reorganization, then the firm must be liquidated. Relative priority doctrine states that balanced consideration is given to all the creditors. This approach provides more flexibility in the reorganization process. This flexibility leads to recent trends allowing firms to follow the relative priority doctrine rather than the absolute priority doctrine.

Verified Answer

Absolute and relative priority doctrine guides the reorganization plan under formal bankruptcy. Recent trends have allowed firms to follow the relative priority doctrine rather than the absolute priority doctrine.