The management buyout team was headed by the agency's managing director, Ian Wright, who yesterday left the agency alongside its head of account management, Jill Taylor, and the creative heads, David Isaac and Kevin Bird.
Wright warned: "An integral part of our strategy was to ensure that all our creditors were paid in full. However, this is now highly unlikely."
Wright, Taylor, Isaac and Bird are believed to be setting up a new agency.
Wright said: "That's probably correct. We've got plans in place."
The directors left after their failure to agree the terms of the management buyout with Mike Dethick, Yellow M's founder. Buyout discussions began in February and were due to be finalised at the end of last month.
Dethick is still the owner of the agency, which rose to fame after its handling of the Conservative Party's election advertising campaign last year, despite the recent closure of Yellow M in Newcastle. Since then he has set up another agency in Newcastle called Guerilla.
At present it is unclear what the news will mean for the agency's client list, which includes the Dunfermline Building Society, a Scottish Widows project and the prestigious Scottish Executive business. The Conservative Party account became dormant after the general elections last June.
Observers are predicting that Scottish Executive may now move Yellow M's portion of the business into another roster agency, Faulds Advertising or Barkers.