Ontario Civil

Financial Institutions

Issuance of credit


Creditor’s action against bank for declaration that it had priority over funds was dismissed

Overdrafts. Creditor financed its sale of debtor with vendor take back note that was secured by general security agreement covering debtor’s assets. Debtor started using services of bank H after creditor refused to subordinate its security to bank H. Debtor opened two related chequing accounts in different currencies and obtained company credit card. Accounts did not allow overdrafts, but debtor frequently went into overdraft and provided funds to cover overdrafts before cheques were at risk of being dishonoured. After debtor went bankrupt, creditor brought action against bank H for declaration that it had priority over funds in accounts used to pay overdrafts and credit card debt and for payment of amounts alleging owing. Creditor brought motion for summary judgment, and bank brought cross-motion for summary judgment dismissing action. Motion dismissed; cross-motion granted. Creditor had not established bank H had extended credit to debtor by way of overdrafts. Overdrafts were created when bank made decision to cover cheque that put account into negative balance. Under bank H’s system, decision to create overdraft could not be made until day after cheque was posted to account. Until such time as bank H made decision to honour or return cheque, it was not providing any credit to debtor or assuming any risk on debtor’s behalf. Debtor always covered cheques with its own funds before bank H made decision to honour cheque, and interest charges were in nature of penalty rather than proof of loan.

Kari Holdings Inc. v. HSBC Bank Canada (2017), 2017 CarswellOnt 566, 2017 ONSC 437, Conway J. (Ont. S.C.J.).

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