Entering into business with a friend or family member can be an appealing avenue for prospective entrepreneurs. One benefit of this type of business arrangement can be access to additional pooled capital as an alternative to borrowing money through traditional means, such as a bank loan. However, even with a sound business partnership in place and sufficient start-up finances, new businesses are not uncommon to be unprofitable and unsustainable, leading to its ultimate closing. Therefore, to protect yourself and your assets, entering into a formal business arrangement is important, regardless of the pre-existing relationship with your future business partner. 

A recent decision from the Court of King’s Bench of Alberta outlines what can happen when a business fails. Money is owed to a friend and former business partner, but no formal business agreement exists.

Friends Enter Into Business Together

The matter of Dave v. Sodhi came before the Court following a business dispute among a number of family friends who had agreed to enter into a business partnership to run a gas station business. When the parties entered into business in 2011, they did so informally, without the assistance of lawyers and formal documents, and instead relied on verbal understandings and trust. Following the closure of the business, disputes arose as to the amounts owed by and to the various parties involved.

The plaintiff agreed to invest $40,000 of his own money into the business to become a 50% shareholder, and the personal defendants (“AS” and “RS”) did the same. AS and RS were married and owned the business and corporate defendant, 1420477 Alberta Ltd. (“142”). The parties agreed to invest the same amount of money and equally share any business profits.

Parties Enter Into Agreement Based on Trust

Things became complicated when AS and RS introduced 142 into the picture. AS and RS were directors and equal shareholders in 142, and they used the company to operate a different gas station. The parties agreed that it would be quicker to get things up and running if 142 was set up as the operator of their new gas station business, with the long-term plan being to eventually transfer ownership from 142 to a new company owned by all parties. This agreement, however, was not reduced to writing. Based on RS’ evidence, the Court understood that she went along with the arrangements that were proposed to her by her husband and the plaintiff regarding the 142’s involvement in the business. Accordingly, the plaintiff provided $40,000 to 142 to reflect his portion of the start-up costs. 

When the gas station opened in November 2011, AS and another party were involved in the day-to-day operations, with the plaintiff occasionally attending to the gas station to make deliveries and check in on business operations. RS was also an occasional visitor. All of the money from the business flowed into and out of an account owned by 142, which the plaintiff did not have access to, which later proved to be a cause of complication. 

Defendant Uses Corporate Bank Account Funds for Personal Gambling Use

By January 2012, it was apparent that AS had been using 142’s bank account to fund a personal gambling habit, making at least 15 withdrawals ranging between $2,000-$3,000. AS did not tell the plaintiff or RS about his gambling habit. 

The gas station business shut down on February 22, 2022, when 142’s bank account balance was $35,663.02. The following day, $30,000 was transferred to a personal account belonging to RS and AS. AS continued using 142’s bank account to fund his personal gambling until April 2012, at which point the account balance was ​​$25,603.79. 

Defendant Argues She Should Not be Personally Liable

While AS and the plaintiff were the main drivers of the business, the Court found that RS was a party to the contractual agreement for the business. The Court noted that her response of “OK” to the business idea equated to her acceptance of the proposal. Additionally, two prior judgments against the business saw RS held personally liable for the obligations of the business regarding employment wages

The Court found that her obligations under the agreement included providing the plaintiff with 50% of the business’ assets. The Court also pointed out that this was not a one-sided agreement, as she had received consideration under it. The Court also rejected her argument that the plaintiff intended to enter into business only with 142, as there was no evidence to suggest an agreement between the plaintiff and 142. 

Court Awards Plaintiff Damages Over $30,000

After reviewing the deposits and withdrawals from 142’s bank account, the Court determined that the bank account should have had $80,000. However, after business losses of $22,242 were considered, the Court found that half of what was left, which was $28,879, was owed to the plaintiff. 

The defendants did not call any accountants to provide evidence in support of the figures reflected in the unaudited financial statements, and the basis for their calculations remained unclear. However, as the parties with exclusive control of the bank accounts used for the business they bore the onus to justify expenditures from that account, which they did not attempt to do. The Court also acknowledged that the numbers were “obscured by the fact that Amrik chose to use the company’s bank account to finance his gambling.” Thus, the Court accepted the plaintiff’s quantification of damages and awarded him damages in the amount of $28,109.08 plus pre-judgment interest.

Contact Getz Collins and Associates for Trusted Legal Advice and Representation in Business Disputes

The business litigation lawyers at Getz Collins and Associates understand the complicated nuances involved in partnerships and business matters. Whether you seek to formalize a business partnership or are involved in a dispute over funds owed, our team of business lawyers will help you formulate an effective legal solution to position you for success. Our firm offers flexible, cost-effective fee arrangements and explores various avenues in pursuit of early dispute resolution. 

With locations in Calgary and StrathmoreGetz Collins and Associates proudly serves clients throughout Alberta, including in Airdrie, Cochrane, Okotoks, Drumheller, Chestermere, Hussar, and the surrounding areas. To schedule a confidential consultation and learn how we can help you with your business dispute, please contact us online or at 587-391-5600.