Administration

Administration is a formal legal process for companies that are insolvent or on the brink of insolvency. Primarily used in the United Kingdom and other Commonwealth countries, it functions as a corporate emergency room, designed to give a struggling business a fighting chance at survival. It's broadly similar to the Chapter 11 bankruptcy process in the United States. When a company enters administration, an administrator—a licensed insolvency professional—is appointed to take control. Their primary job is to manage the company’s affairs and assets with the main goal of rescuing the business as a going concern. If a full rescue isn't possible, the administrator aims to achieve a better outcome for the company's creditors than if the company were simply wound up immediately through liquidation. This process provides a crucial moratorium, which is a legal freeze on all legal actions against the company, giving the administrator breathing room to assess the situation and formulate a plan without pressure from individual creditors suing the company.

A company can enter administration in a couple of ways. The company's directors can appoint an administrator if they realize the business is insolvent and can't pay its debts. Alternatively, a major creditor (often a bank holding a charge over the company's assets) or the court can initiate the process. Once appointed, the administrator effectively becomes the company's temporary CEO. They take full control from the directors and their primary duty shifts from the company's shareholders to its creditors. The administrator has 8 weeks to send a statement of proposals to all creditors, outlining the company's financial situation and their plan for the future. These proposals detail how they intend to achieve one of the three statutory purposes of administration.

The administrator must act in the best interests of all creditors and will pursue one of three hierarchical objectives. Think of it as a waterfall: they must aim for the first objective, and only if that's not reasonably practicable can they move to the second, and so on.

• Path 1: Rescue the company as a going concern. This is the holy grail of administration. The goal is to restructure the company, sort out its finances, and return it to the control of its directors as a profitable, viable business. This is the best outcome for employees and the economy, but sadly, it's the least common.
• Path 2: Achieve a better result for creditors. If saving the entire company isn't feasible, the administrator will try to achieve a better outcome for creditors than a straightforward liquidation would. This often involves selling the profitable parts of the business and its assets. A common method here is the pre-pack administration, where a sale of the business is arranged before an administrator is formally appointed, and the sale is completed immediately upon appointment. This preserves the value of the business and saves jobs, but the original company shell is usually left with its debts.
• Path 3: Sell company property to pay secured or preferential creditors. This is the last resort. If the business can't be rescued or sold, the administrator's job is simply to sell off the company's assets to pay back specific groups of creditors. Once this is done, the company is typically dissolved or moved into liquidation to finalize the winding-up process.

For an ordinary investor, a company entering administration is almost always catastrophic news. The core principle to understand is the hierarchy of payment. When a company is in administration, any money raised from selling the business or its assets is used to pay off debts in a strict order:

1. 1. The administrator's fees and costs. They always get paid first.
2. 2. Secured creditors. These are lenders, typically banks, who hold a fixed charge (like a mortgage) over specific assets.
3. 3. Preferential creditors. This includes employees for unpaid wages and pension contributions.
4. 4. Unsecured creditors. This large group includes suppliers, customers, and the tax authorities.
5. 5. Shareholders. That's you. Equity holders are dead last in line.

In the vast majority of administrations, the company's liabilities far exceed the value of its assets. After the top tiers of creditors are paid, there is simply no money left. This means the shares held by investors become completely worthless. A plunging share price for a company rumored to be in trouble might seem like a bargain, but it's a classic value trap. From a value investing perspective, which prioritizes the preservation of capital, buying shares in a company on the verge of administration is pure speculation, not investing. The probability of a permanent and total loss of capital is exceptionally high. Your best move is to steer clear.