In Kari Holdings Inc. v. HSBC Bank Canada, C.I.F. Furniture Limited ("CIF") opened two commercial chequing accounts at HSBC Bank Canada ("Bank"). The accounts had no automatic overdraft protection. Subsequently, CIF was declared bankrupt and placed in receivership. Kari Holdings Inc. ("Kari") was a secured creditor of CIF. Pursuant to an inter-creditor agreement, Kari's security interest was subordinate only to the security granted by CIF to another bank and to a senior subordinated debenture in favour of CIF's controlling shareholder. Kari alleged that on twenty-seven occasions, the Bank exercised its discretion to grant overdraft protection to CIF and repaid itself with collateral that was subject to Kari's prior security interest. Kari sought an order that the Bank pay Kari $467,455 for the alleged overdrafts.
For the following reasons, the Ontario Superior Court of Justice concluded that the Bank did not in fact provide credit to CIG by way of overdraft and consequently dismissed Kari's action against the Bank. An overdraft is created when the Bank makes a decision to cover a cheque that puts the account into a negative balance. Here, that decision could not be made until the next day when the account manager reviewed the Advance Posting Report. By the time the Bank made the decision to honour the cheque, CIF had covered it with its own funds. Although interest was charged as soon as a cheque was posted that put an account into a negative balance, the use of the word "interest", without more, was not sufficient to establish that the Bank was providing overdraft facilities to CIF. Finally, the Bank could take into consideration the funds in one account while deciding whether to honour or return a cheque that put the other account into a negative balance. This was because the two accounts were covered by one Account Agreement that specifically entitled the Bank to consolidate and set-off amounts owing as between the two accounts.
The Court also noted that in the event it incorrectly concluded that the Bank did not provide credit to CIF by way of overdraft, the use of monies in the accounts to repay the Bank was in the ordinary course of CIF's business as permitted by the applicable General Security Agreement.
This case highlights the importance of reviewing Account Agreements and General Security Agreements to ensure maximal protection of a creditor's security interest.