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Section 240: Sections 239 to 266 [Repealed by the Indian Partnership Act, 1932]

Indian Contract Act • Official Statutory Text & Practice Guide

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Act 1872
Section 75 All 266 Sections of Indian Contract Act Section 77

Legal Commentary & Landmark Judgments: Section 240

Section 240 originally codified the Bovill's Act principle that an advance of money on a contract to receive a rate of interest varying with profits does not of itself constitute the lender a partner, now reenacted as Section 6, Explanation 2(a) of the Indian Partnership Act, 1932.

  • Exclusion of Profit-Linked Loans from Partnership: Historically established that a creditor advancing capital who receives a share of profits in lieu of or in addition to interest does not become a partner without mutual agency.
  • Preservation of Creditor-Debtor Relation: The lender retains his status as a secured or unsecured creditor with priority over partners upon insolvency or dissolution.
  • Modern Reenactment in IPA 1932: Repealed by Act 9 of 1932 and incorporated as Explanation 2(a) to Section 6 of the Indian Partnership Act, 1932, anchoring modern venture debt and structured finance.
Key Landmark Precedents:
  • Cox v. Hickman (1860) 8 HLC 268: The House of Lords ruled that creditors who take a share of business profits to pay off debts do not become partners because the business is not carried on by the debtor as their agent.
  • Mollwo, March & Co. v. Court of Wards (1872) LR 4 PC 419: The Privy Council held that an agreement where a merchant received large advances from a financier in exchange for a share of profits did not make the financier a partner, affirming Section 240 principles.
  • Badeley v. Consolidated Bank (1888) 38 Ch D 238: Affirmed in Indian commercial law: a lender receiving a profit share as security or return is not a partner unless management control establishes mutual agency.
Courtroom Practice & Strategic Litigation Guidance:

In venture capital financing, mezzanine debt, and structured lending agreements with revenue-share kickers, incorporate explicit disclaimers of partnership, citing Section 6 Explanation 2(a) of IPA 1932 to ensure lenders are shielded from joint and several trading liabilities.

Section 75 All 266 Sections of Indian Contract Act Section 77