That is when the doors will close. You can get away for maybe a week or two with a late payroll, but if you have one unhappy soul who complains to the State Bureau of Labor, well, they take action right away to get the employees their pay that is due. When this type of situation does occur, depending on which state you are in, the government pretty much locks down anything of value, bank accounts, inventory, etc., until all employees both hourly and salaried are fully compensated for what is due to them. Unpaid company staff come before any other lien holders, debtors, shareholders etc. Both Federal and State laws are pretty clear in this respect. If not, the risk of jail time or severe forfeiture of personal funds is at stake for company officers, possibly the board members. Things can get real ugly in short order. Say you are a customer who hears your supplier cannot make payroll? Are you going to continue to place or think about ordering, not knowing if your order will ever show up, especially if a deposit is required up front? Or, whatever you are to be invoiced for, is taken over by the state to be deposited into a account to pay off the workers. Things like that, and that is just the tip of the iceberg of what can happen.
We had a vendor in the past go BK and the outstanding accounts receivable that the vendor had were essentially seized by the state to be paid to the employees instead of the vendor. Other customers got the same from the Bureau of Labor.
What could really complicate things in this sort of a potential situation for Cerp is that you have not only Indiana, but California, and possibly other states for field sales staff, not to mention whatever is left of staff over in Europe. Very messy if this does happen.
There are no hourly employees left. The staff in Europe is all independent sales agents-not employees. So the only ones left that will get skrewed are the ones perpetuating the scam. They can run to DOL and file a complaint which will be hung up with the state and their attorneys. At that point, they will be terminated. They can try to find another job (let's be honest-they have no other prospects) and collect unemployment. Or they can continue to work and perpetuate the fraud with Freddy issuing some more shares to pay them through year-end. They are all in on this and know when the bankruptcy is coming. In the meantime, they are selling off existing inventory (can't get any new raws from suppliers because it's all Cash in Advance) and collecting (begging) A/R from customers when they can (not very successfully). FYI-once they declare bankruptcy, the court will go back and "reverse" all cash transactions that happened in the 6 months prior. Yes, typically wages are paid first but that is all based on the bankruptcy court not the state . They are just one of the creditors standing towards the front of the line.
As for customer advances-they don't have any. Only way they can sell this junk is to offer huge price discounts and very extended payment terms.
They need to be bringing in $1M cash a quarter to cover payroll. Not even selling that. Only have about $200K-$400K A/R due in quarter to collect (if none of customers are past due). Freddy is already setting up his next venture with them so he doesn't care about collecting it anyway. He goes B/K and court never collects it. The suppliers/debt holders/shareholders get focked and the employees move over to the new venture. The only ones paid out are any state or federal tax debts.