May 2010 has seen respected digital media agency i-level go into liquidation after 10 years of trading. Does case law have some answers as to how clients can protect themselves against this happening to their agency after media booking monies have changed hands? Hannah Willson investigates.
When: May 2010
Law stated as at: May 2010
On 6 May respected digital media agency, I-level was placed into administration by preferred creditor, ECI, and into liquidation shortly after, citing the unavailability of further funds as the reason. This shock exit from the market has been put down to the loss of key client COI in February earlier this year, an account worth £40m to i-level and accounting for 40% of its business.
I-level was a major independent player in the UK digital media industry and had big ticket clients such as Google, Yahoo!, Microsoft and Orange who could all be nursing multi-million pound losses; Orange’s digital business alone was worth in the region of £1 million per month and it is believed that the agency was acting as a principal for at least 2 months’ worth of media placements.
We can look back through the case law to see what options are open to Zolfo Cooper, the appointed liquidators, with any client money on account or owing from I-level’s debtors.
Some interesting cases
The case of Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1983 C. No. 3983 has some similarities to I-level in that it involved the insolvency of an advertising agency and the claimant was its client.
Carreras Rothmans Ltd (“Rothmans”) used advertising agency Freeman Mathews Treasure Ltd (“FMT”) to do all of its media bookings, paying a monthly fee plus all third party debts incurred by the agency in the placing of the ads. Rothmans had concerns about the financial health of FMT and put in place an agreement (the “July agreement”) that meant that all money paid by Rothmans to FMT for the settlement of third party debts such as monies owing to media owners was to be placed in a separate special account solely for that purpose.
The July Agreement provided that in the event that a balance remained, the money was to be repaid to Rothmans. This special account was set up and the bank was put on notice of its purpose. Shortly after FMT was placed into liquidation the special account was frozen before the cheques to the third party media owners had cleared, leaving them unpaid and resulting in the third parties threatening to stop carrying the advertising if the debts remained unpaid.
Rothmans, which was naturally keen to continue its advertising, was assigned the debts of FMT and paid the third parties and consequently sought to be repaid the funds in the special account as a balance in accordance with the July agreement. The liquidators refused and claimed that these funds were not held on trust and that the July agreement was unenforceable as it was an attempt to put assets out of the reach of creditors; which is against public policy following the decision by the House of Lords in British Eagle (the anti-deprivation rule).
Media money was held on trust, says Peter Gibson J
In the ensuing proceedings, Peter Gibson J, applying the principles set out in the 1970 case Quistclose, held that the July agreement was enforceable and that the money was held on trust for Rothmans. The reasoning being that the money had been paid to FMT for the specific purpose of paying the third party debts and it was clearly intended that FMT was not able to deal with it on its own account, supported by the fact that the bank was put on notice of the purpose.
Therefore at the date of liquidation the monies in the special account were not assets of FMT. The book debts to the third parties had been assets of FMT but these were discharged no later than the date when the money was paid into the special account.
This position has been further clarified by the Court of Appeal in the recent cases of Perpetual Trustee Company Ltd v BNY Corporate Trustee Services Ltd and Butters v BBC Worldwide Ltd  EWCA Civ 1160. Here it was held that the anti-deprivation rule will operate to avoid a transfer of assets from a company only if the transfer is triggered by the company’s insolvency. If the transfer occurs before the company’s insolvency, it cannot fall foul of the anti-deprivation rule.
Why this matters:
The fall of seemingly successful I-level will be prompting concerns in the industry but these cases have shown that a well structured transaction and carefully drafted documentation can potentially mean that any money being held by the media agency for a specific purpose may be able to be protected.