Spiralfrog, which was due to be launched in December, planned to offer users songs for free as long as they agreed to watch adverts while their music was being downloaded.

This week it emerged that at a board meeting on Boxing Day, Spiralfrog’s chief executive, Robin Kent, was fired, prompting the resignation of at least five other directors, including a previous head of the Recording Industry Assocation of America (RIAA).

At least eight other senior executives, including Robert Goodale, who co-founded UltraStar entertainment with David Bowie, the chief financial officer and the head of marketing also resigned after the meeting, apparently in protest at the board's decision.

The other board members to have left the company include Jay Berman, who was previously head of the International Federation of the Phonographic Industry, and Richard Rowe, a previous head of Sony Music Publishing.

The meeting at which Mr Kent was ousted took place on Boxing Day, sources said. Seven of the company's nine original directors were present, including Mr Kent and two loyal to him. They were voted down by the remaining four directors, among them the company's chairman and founder, Joe Mohen, an internet entrepreneur.

It is unclear why Mr Kent was asked to leave the company, though a source close to the company said that it was because of differences between him and Mr Mohen, whose management style Mr Kent found "unacceptable".

"It was a kangaroo court - there seemed to be no rhyme or reason to it," the source said.

The company's main backers, two London-based venture capital firms, are said to have put together a resolution calling for Mr Kent to be reinstated, though that would require 50 per cent board approval.

The make-up of Spiralfrog's board in the wake of the departures remains unclear.

Neither the company nor its lawyer, Marc Jacobsen, of Greenberg Traurig, could be reached for comment today.

A lack of deals with other major record labels, as well as a shortage of cash, may have been reasons why Mr Kent, the former chief executive of Universal McGann, the advertising agency, had been asked to leave.

It is understood that Spiralfrog, which secured about $10 million worth of venture capital funding before announcing its service last year, is still planning to launch its site next month.

Spiralfrog was not the first company to offer music for free "legitimately", but the support of Universal, which owns the largest catalogue of any record label, was seen as a sign that the music industry saw a future in its advertising-supported model.

The company had also signed an agreement with EMI Music Publishing, giving it access to the label’s vast song library, as well as a number of companies that were keen to place advertising, including Perry Ellis, the fashion label.

Steve Mayall, who runs the music industry consultancy Music Ally, said that the shake-up at Spiralfrog did not spell the end of the advertising-supported music downloads. "Internet radio is essentially advertising supported, as is Yahoo!’s video service. The advertising model is a strong proposition which still has great potential," Mr Mayall said.

Last week a report by the International Federation of the Phonographic Industry concluded that sales of music online were growing at a disappointing rate, and that more music was still downloaded illegally than was obtained from legitimate sites.

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