Breaking up is Hard to Do: Hidden Business Debts and Breach of Contract When a Business and Personal Relationship Ends

Written on behalf of Arbesman Hamilton LLP

An Ontario court recently addressed a situation involving the separation of a common-law couple who, in addition to being life partners, had also been business partners.

What Happened?  

Two veterinarians, Hicks and Armstrong, were involved in a 22-year common-law relationship, which ultimately came to an end in 2015.

During the course of their relationship, they ran two veterinary clinics together, while Armstrong also had a fitness business. In addition, the couple also owned a real estate holding company that oversaw the property assets of their ventures. The couple’s businesses were in heavy debt at the time of their separation. During a settlement mediation, Hicks agreed to buy out Armstrong’s interest in the business and to provide her with three years of spousal support.

Undisclosed Debts

Complications arose during the year it took Hicks to finance nearly three million dollars in financing to settle the businesses’ debts and pay out Armstrong. Shortly after the couple separated, Armstrong began to keep separate accounting books for her business interests. Hicks eventually discovered Armstrong had undisclosed debts including:

  • Unremitted HST in the sum of $47,097.77;
  • Invoices for snow clearing services in the sum of $6,102.00;
  • Advertising invoices for Booster Magazine in the sum of $3,039.87; and
  • Bad and/ouncollectible debts from Spoil Me Pets in the amount of $26,989.64.

Hicks pursued an action to absolve himself of Armstrong’s undisclosed debts.

Looking for a Remedy for Breach of Contract

Meanwhile, Armstrong sought damages for breach of contract due to Hicks taking a year to obtain the financing needed to make good of his end of the contract.

Regarding Armstrong’s hidden debt, the Judge turned to the settlement agreement in order to affirm what the couple agreed to

The Respondent (Hicks) shall assume full responsibility for all accounts payable for any of Arthur Veterinary Clinic Inc. (“AVCI”), Arthur Veterinary Professional Corporation (“AVCProCO”), North Wellington Animal Hospital (“NWAH”), and 2233840 Ontario Inc, (“223”), which accounts include but are not limited to:

(a) any Veterinary Purchasing invoices, including the account opened by the Applicant (Armstrong) when she operated the business;

(b) any amounts owing to Ward and Uptigrove; or

(c) any wages, benefits, or vacation pay owed to any employee.

  1. For greater certainty, if any accounts are in the name of the Applicant (Armstrong), but were for business related items for AVCI, AVCProCO, NWAH, and 223, the Respondent (Hicks) shall be responsible for these as well.
  2. The Respondent (Hicks) shall provide to the Applicant (Armstrong) a complete release or indemnity in relation to any monies owed by AVCI, AVCIProCo, NWAH, and 223, save and except any lease obligations entered into by the Applicant (Armstrong) on a personal capacity with respect to 223, in a form approved by counsel, including any debts associated with:

(a) corporate taxes owing;

(b) property taxes owing; or

(c) HST or source deductions owing.

To be clear, This Order is meant to be a comprehensive resolution of all outstanding issues between the Respondent Robert Bryan Hicks and the Applicant Kathryn Alexandra Armstrong, and neither will have any course of action as against the other in relation to these matters If it is discovered after these Minutes are signed that a further non-disclosed liability attaches to the Applicant Kathryn Alexandra Armstrong, which is related to the AVCI, AVCProCo, NWAH, or 223, it is understood that the Respondent Robert Bryan Hicks is not to assume responsibility for same, subject to paragraphs 10 and 11 herein.

The settlement agreement clearly covered what was to be done with HST debt. The Judge ruled that such debts must have been known to Hicks, especially since he had access to the company’s books for a full month leading up to the conclusion of the settlement being reached.

Regarding the other debts, the Judge looked at section 10 of the settlement agreement, which states Hicks would become responsible for all debts, including any of an undisclosed nature.

As for Armstrong’s claim against Hicks, the Judge ruled that it is not unreasonable for such a complicated business deal to take time to complete. The Judge ordered that the only damages payable to Armstrong would be 2% interest on the money she was to receive upon Hicks’ obtaining of financing.

The lawyers at Arbesman Hamilton LLP bring a personalized and practical approach to legal disputes. If you are a business owner going through the emotionally and financially trying times of a separation or divorce, we can help. We rely on our combined family and corporate law experience to advise entrepreneurs and help them identify and mitigate potential legal risks, including any that may arise from a family dispute that may affect their business. Contact us by email or by phone at 416-481-5604.