The Risks of Owing a Business with Your Spouse: What Can Happen After Separation?
September 6th, 2018
Owning a business with your spouse can be great way to be an entrepreneur and build a legacy. However, when your marriage or long-term relationship ends, owing a joint business can quickly become a significant financial liability and a huge headache, as was evidenced in a relatively recent Ontario decision.
History of the Parties
The parties in question operated a cleaning business (as a partnership) during their marriage. After they separated, they entered into a without prejudice agreement that covered various outstanding issues stemming from the breakdown of their marriage, including how they were going to deal with their business on an interim basis.
Breaches of Initial Agreement
Not long after the agreement was signed, the ex-wife claimed that the ex-husband improperly took $19,000 from the business’ bank account, cancelled cards used in the business, removed equipment and inventory from the business premises, and removed license plates from business vehicles.
The parties eventually entered into a consent order several months later, including the following provisions:
- The business would be appraised;
- the ex-wife would buy the ex-husband’s interest in the business (subject to financing) and, in the meantime, would oversee the management of the business;
- the ex-wife would provide a bi-weekly basis a copy of all bank transactions, payroll records, vehicle logs and shift schedules to the ex-husband;
- the ex-husband would continue to receive his draw from the business;
- the ex-husband’s son would also continue to receive a salary from the business;
- neither the ex-husband nor his son would engage in the business activities and would not be associated with any competitive business;
- the ex-husband would return to the business all equipment, cleaning supplies, inventory and business vehicles;
- the status quo for the business to be maintained and no unilateral/without notice change may be undertaken by either the ex-wife or the ex-husband.
The Business Relationship Continues to Deteriorate
The ex-husband claimed that, within a few days, the ex-wife failed to pay him the draw that he was entitled to under the consent order. He also claimed that the ex-wife began to take money from the business bank account for her personal use.
Further back and forth allegations were made by both parties, and the situation between them continued to deteriorate, and illustrate the ramifications of owning a business with your spouse if your relationship breaks down. Within several months, the ex-wife terminated the ex-husband’s son’s employment due to theft allegations.
Each party then filed motions against one another (the ex-husband seeking access to the business bank account and the ex-wife seeking to prevent his access to it). Evidence disclosed a pattern of what the court called “serious interference and harassment” by the ex-husband. His motion was eventually dismissed, and the wife obtained a restraining order preventing the ex-husband from attending at the business premises and from interfering with its operations. The husband was also ordered to return the license plates he had removed.
While all of these disputes were ongoing, the business was valuated at just over $191,000 (which included the uncertain assumption that the business property had a fair market value of $350,000).
Even after the restraining order, disputes continued between the parties over the business property as well as another property they owned together (a rural camp property).
The parties filed motions seeking a court disposition of these outstanding matters.
The court noted that the ex-husband’s objective “appear[ed] to be to frustrate the [ex-wife’s] ability to manage the business”.
The court further noted that while the ex-husband claimed that the successful continuation of the business was “very important to him”, his actions seemed inconsistent with that assertion. Evidence showed that:
- when the bank for the business called on its loans (including the business premises’ mortgage), the ex-husband would not cooperate with the wife to refinance the property;
- the property was ultimately vested in the ex-wife’s name in order to forestall enforcement proceedings.
Additionally, the court called some of the ex-husband’s other actions “disingenuous”, and noted that
Despite his indignation at the course of events, the [ex-husband may be viewed as his own worst enemy; complicating matters, exacerbating the problems, compounding issues, all without perceptible benefit to him and taking the focus off what he says the applicant should and shouldn’t be doing.
The court ultimately concluded that “reasonable steps” were to be taken to protect the existing business while its true value was eventually made clear.
Financial Litigation‘s family law practice helps high-income clients and business owners through the difficult process of divorce. We can provide guidance on complex asset valuation and property division issues. specifically tailored to the needs of professionals and entrepreneurs. We can help you protect your assets during marriage, and ensure that separation or divorce does not put your hard work at risk. Call 416-769-4107 x1 or contact us online to schedule a consultation.