Like many businesses, agencies in the Advertising & Marketing sector will be assessing their solvency position in light of the economic impact caused by Covid-19. Whilst many agencies will be cutting costs, reviewing forecasts and taking advantage of various government backed grants and schemes to keep the “doors open”, it’s important for directors to regularly consider the actual solvency position of their agency. Not doing so could result in personal liability for directors down the line, notwithstanding the Government’s changes to the UK insolvency framework.
Of course, its also important to think about the solvency of clients before taking on any major commitments, such as contracts with production companies, deals with major talent, or media bookins. Agencies usually enter into these contracts as 'principal', not as an 'agent' in the legal sense, so the agency will be liable to pay the supplier, even if the client goes bust.
At the same time, agencies also need to think about the solvency of their suppliers too! If a production companies goes bust part way through a production, the client may still demand that the agency delivers its advertising materials, even if the first 50% of the production budget has been used and cannot be recovered.
We recently published an article by my colleagues Tim Leeson and Sadiq Tajbhai that looks at the issue of insolvency in more detail, and includes steps that we recommend agencies take at an early stage - please click on the link below to read the full article.
Please don't hesitate to get in touch if you would like to discuss any of the points raised.
In periods of doubtful solvency, the directors must prioritise the interest of the company’s creditors rather than the interests of its shareholders. A breach of fiduciary duty in this respect by directors can result in a claim for misfeasance being made against the directors (that is the wrongful exercise of a director’s powers).