Need advice, urgent

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Holida

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I'm responsible for all dialogs made with abroad through me.
Recently we booked rooms in a hotel in Italy through an agency. After a while I was instructed to cancel the rooms, as the agency asked for pre-payment while the visitors did not get visa issues settled. When I cancelled it was after expiry of free cancellation period.
We contacted the hotel directly as the visitors were required confirmation of booking from the hotel itself by the consulate. So when the agency contacted them about cancellation we received a call from the hotel asking whether they should cancel the rooms or not. We said not.
After that we were asked to make payment to the agency. Prior to the payment we informed the agency that the rooms are still oh hole and received their confirmation that we will not double invoiced as the agency is a contract partner of the hotel and the will surely settle account with them.
Now, the hotel is asking us to provide voucher or confirmation from the agency, but the agency is insisting that they cancelled the booking. I'm confused,
Please advice what shall we do now.
Thank you in advance,
Holida
 
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