Revolving Loan Facilities, Demand Promissory Notes, and Enforceable Debt Under Section 138 NI Act: Lessons from HDFC Bank Ltd. v. State of Maharashtra (2025)

One of the essential requirements for a prosecution under Section 138 of the Negotiable Instruments Act, 1881 is that the dishonoured cheque must have been issued in discharge of a legally enforceable debt or liability. While this principle appears straightforward, disputes frequently arise in cases involving revolving credit facilities, overdraft arrangements, and demand promissory notes.

The proceedings in HDFC Bank Ltd. v. State of Maharashtra (2025) have brought renewed attention to this issue, particularly in the context of a revolving loan facility supported by a demand promissory note and a subsequent cheque dishonour.

The Supreme Court has consistently held that a cheque must represent an existing liability on the date of its issuance. In Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd., the Court clarified that Section 138 applies only where the cheque is issued towards a legally enforceable debt or liability.

In the context of revolving loan facilities, borrowers often argue that the outstanding liability is not fixed because the amount drawn and repaid fluctuates over time. However, courts generally focus on whether a definite liability existed when the cheque was issued and presented for payment.

Accordingly, the mere fact that a facility is revolving in nature does not prevent the outstanding amount from constituting an enforceable debt under Section 138.

A demand promissory note (DPN) remains one of the most significant documents evidencing a borrower's liability. By executing a DPN, the borrower acknowledges an obligation to repay the amount due upon demand.

In HDFC Bank, the lending arrangement was supported by a demand promissory note executed in favour of the bank. Such documents often serve as strong evidence of the underlying debt and may reinforce the presumption that the cheque was issued towards a legally enforceable liability.

While borrowers may contend that a promissory note was executed merely as security, courts generally examine the surrounding loan documents, account statements, and transactional history to determine whether an actual debt existed at the relevant time.

Another issue that frequently arises is whether classification of the account as a Non-Performing Asset (NPA) affects the enforceability of the debt.

In principle, NPA classification does not extinguish the borrower's liability. Rather, it typically accelerates the lender's right to demand repayment of the outstanding dues. Consequently, where a cheque represents an amount already due and payable, subsequent classification of the account as an NPA does not, by itself, defeat a prosecution under Section 138.

The critical inquiry remains whether the debt existed and was legally recoverable when the cheque was issued and presented.

The case highlights the importance of maintaining complete documentation in cheque dishonour proceedings. To establish the existence of an enforceable debt, lenders should preserve:

• Loan agreements and sanction documents;

• Demand promissory notes and security documents;

• Statements of account reflecting the outstanding liability; and

• Records linking the cheque amount to the borrower's actual dues.

A well-documented transaction history can significantly strengthen the complainant's ability to establish the statutory ingredients of Section 138.

The issues arising in HDFC Bank Ltd. v. State of Maharashtra underscore the continuing importance of proving a legally enforceable debt in cheque dishonour prosecutions. The existence of a revolving credit facility does not, by itself, negate liability under Section 138, particularly where the lender can demonstrate an outstanding debt supported by account records and loan documentation.

Demand promissory notes continue to play a significant evidentiary role in establishing liability, while NPA classification generally affects the timing of repayment rather than the existence of the debt itself. As cheque dishonour litigation evolves, courts are likely to continue focusing on the substance of the transaction and the evidence demonstrating the borrower's outstanding obligation.