Equitable fraud on creditors – bankruptcy composition set aside

Among several grounds for setting aside a composition between a bankrupt and his creditors under the Bankruptcy Act was ‘equitable fraud’.

It had emerged in evidence that the bankrupt, Mr Zappia,

‘had made representations to a number of creditors that if and when he rehabilitated himself he would be aiming to repay the money he owed to them irrespective of the composition’.

Justice Jagot said that this raised

‘the very real issue that the composition is affected by a kind of equitable fraud’.

A composition is a contract between all creditors. The Judge cited old authority to the effect that if a debtor ‘privately agrees with one creditor to induce him to’ compromise, this ‘tends to deceit of the other creditors, who relied on an equal composition, and did it out of compassion to the debtor’, such being an ‘underhand bargain’.

Here, while the evidence did not establish the existence of any binding contract between Mr Zappia and some of his creditors, it did show that he represented to some of them that he would repay their debts in full if and when he was able to do so.

From this, Justice Jagot said

‘it must be inferred that those creditors may well have voted in favour of the composition on the basis of an expectation that they would or could receive more than the composition enabled them to receive’.

This was a factor which weighed ‘heavily in favour of the setting aside of the composition’, which it was, for this and other reasons. Deputy Commissioner of Taxation v Zappia [2019] FCA 2152


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