MUMBAI: The history of the advertising industry has its fair share of examples of client default on payments leading to agencies bleeding losses. A classic case is that of JWT Walter Thompson (Now known as JWT), having to wind up back in 1974 due to non-payment by clients. Although the company resurrected a few years later, it still shows that companies aren’t secure especially when clients declare themselves bankrupt.

In a fresh case that stirred the conversation about defaulting clients, media agency Madison Worldwide and creative agency Leo Burnett have filed a case against Chinese electronic brand LeEco over non-payment of dues in India. It failed to make payments for the period from January-December 2016, for which Madison is suing the company for Rs 39 crore plus interest in a Hong Kong court, while Leo Burnett has filed a case in the Bombay High Court for its dues of Rs 2.65 crore.

In a typical scenario, if an agency doesn't pay the media on time, it stands to be blacklisted by the media and will lose its accreditation with the industry. This could be a deal-breaker for them since, without accreditation, agencies have to pay the media in advance for any further business. In such a situation, if the agency does not have a large amount of fund to spare, it might have to shut down.

Dentsu Aegis Network chairman and CEO South Asia Ashish Bhasin says, “Sometimes clients delay payments because there is a genuine reason but quite often, clients default on the payments deliberately and that puts the agency in a tight spot. Although there is a legal route, it is often cumbersome and long-drawn and agencies don’t have that kind of bandwidth. But if there is no option, that is what they have to do.”

Calling it unfair and need for stronger laws to be implemented for the same, Publicis Worldwide chief creative officer Bobby Pawar believes it should be illegal for clients to get away without paying for the services they’ve consumed. “It is very unfortunate as more often than not, it is the agency that has to bear the cost of it,” he says.

For print ads, the credit period is usually 45 days from the month of activity. Here, the agency has to pay media, irrespective of client payment and earns only when the client pays. Non-payment or outstanding can result in blacklisting of the agency and all activities for the agency across all clients.

For television and radio, the credit period is 60 days from the month of activity. The agency has to pay only after the client pays, and earns only when payment happens. Problematic clients or habitual defaulters are closely monitored by Indian Broadcasters Federation (IBF), the regulatory body for TV and radio. Serial offenders work mostly on advance while tripartite agreements are usually the norm.

For instance, if a client owed the agency Rs 7.65 crore at a certain point in time which was long overdue, at five per cent media commission, the agency retained only Rs 38 lakh. Now if the client still has an outstanding unpaid debt of Rs 1.56 crores, the net amount is a loss of Rs 1.18 crore.

Havas Media chief finance officer Pritesh Bhatnagar believes bad debts always hit the bottom line and its impact on P&L is always significant. “Agencies need to be more prudent in agreeing to the credit terms with clients. We ensure we follow our internal credit control guidelines and policies to safeguard our interests,” he adds.

Ad agencies must compulsorily approach the Advertising Agencies Association of India (AAAI) to recover outstanding debts but with no assurance of recovery. At best, the AAAI can prevent the media from taking any new contracts from the same client.

Extended credit lines are vital to maintaining a competitive edge and brands may be required to have credit insurance as part of a tender, to reassure stakeholders or satisfy the bank. Advertising and media companies face risks when selling and often rely on future bookings for media space and general advertising from a number of different providers. While credit checks are routinely conducted on new clients, it is impossible to track their status for the duration of the agreement. Remarking that the industry is starting to get a little more organised, Bhasin makes a point that stringent actions against such clients need to be taken not just by agencies, but also by involving various industry bodies. “It is important for agencies to do reasonable credit rating check for clients.”