“An exception to the absolute priority rule that enables holders of equity to retain their equity interests in the debtor even though a senior non-accepting class has not been paid in full, if the equity holders contribute new capital or other form of acceptable “value” to the debtor.
The rationale for the new value exception (or new value corollary, as it has sometimes been called) is that if the equity holders contribute “new value” under a plan, they are not running afoul of the absolute priority rule’s fundamental prohibition of the retention or receipt of property “on account of” their already existing ownership interests in the debtor.
The elements of the new value exception were judicially created and include that the value must, in fact, be “new” (not something that has already been provided by the equity holders), must be in the form of money or money’s worth (not in the form of “sweat equity” or some other intangible form of contribution), must be substantial, and must have a value equivalent to or greater than what the equity holder would receive under the plan.
Creditors have routinely attacked new value plans as violating the absolute priority rule, arguing that no matter what new value equity holders propose to contribute, the exclusive opportunity to receive or retain equity interests in the debtor is, in and of itself, property received by the equity holders on account of their existing interests in the debtor. This argument appears to have been accepted by the United States Supreme Court in the LaSalle case, at least as to any exclusive opportunity provided by a debtor to its equity holders in a plan proposed during the exclusivity period.”
This definition is courtesy of our friends at Polsinelli who publish the Devil’s Dictionary of Bankruptcy Terms. You can access the Devil’s Dictionary here.
For more information about the new value exception, read Dealing with Corporate Distress 09: All About “Claims” in Bankruptcy