Re Patrick and Lyon [1933]

Re Patrick and Lyon [1933] Ch 786 involves Maugham J's definition of fraud as actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame. The case centres on creditors alleging that the director deliberately delayed the liquidation of a company to purchase assets that could be charged under debentures owed to him.

The claimant, creditors of a consistently loss-making company, claimed that the director intentionally delayed the liquidation process by six months to acquire assets to be charged under debentures owed to him. The claimant sought to hold the defendant personally liable under Section 275 of the Companies Act 1929 (now Section 213 of the Insolvency Act 1986) for carrying on the business with the intent to defraud its creditors.

The director was not held personally liable. The court found that the company's business was conducted to clear stock and not to secure assets as security for debentures. Additionally, there was insufficient evidence to establish fraud in this case.

Maugham J, in providing a definition for fraud, asserted that the words "defraud" and "fraudulent purpose" in the relevant section denote actual dishonesty involving real moral blame, according to prevailing notions of fair trading among commercial individuals. He emphasised that while he was not defining fraud, this understanding of the term must be one of its elements, as used in the statutory provision.

Maugham J's definition of fraud in this case is stricter than the definition he provided in Re W C Leitch Bros Ltd [1932], emphasising the element of actual dishonesty involving moral blame. The diversity in the construction given to intent to defraud by Maugham J led to interpretative difficulties. The case raises questions about the appropriateness and effectiveness of current civil procedures under section 213 of the Insolvency Act for fraudulent trading, especially considering the same test is applied to both civil and criminal proceedings.

In essence, Re Patrick and Lyon adds nuance to the understanding of fraud in the context of insolvency law, emphasising the need for actual dishonesty and moral blame.
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