Cenric Group Pty Ltd v Bundanoon Sandstone Pty Ltd (No 2)

1. [1]

   Cenric Group Pty Ltd seeks a freezing order restraining Bundanoon Sandstone Pty Ltd from dealing with or diminishing the value of its assets in Australia up to the unencumbered value of $3,958,651.08.

2. [2]

   That figure is the amount of a judgment entered by McDougall J against Bundanoon on 25 October 2018 following delivery of his Honour’s judgment on 18 October 2018: Cenric Group v TWT Property Group Pty Ltd [2018] NSWSC 1570.

3. [3]

   I discharged an earlier freezing order made ex parte by Ball J on 15 November 2018 for the reasons I set out in my judgment of 19 November 2018: Cenric Group Pty Ltd v Bundanoon Sandstone Pty Ltd [2018] NSWSC 1790.

4. [4]

   It is common ground that my setting aside of Ball J’s order did not affect Cenric’s entitlement to move, on notice, for a further order: for example Harrem Pty Ltd v Tebb [2006] NSWSC 1415 at [15]-[17] (Palmer J).

5. [5]

   The proceedings before McDougall J concerned the harvesting of sandstone by Bundanoon at a site in Pyrmont.

6. [6]

   TWT Property Group Pty Ltd obtained approval to construct a multi-dwelling building on the site. It was a condition of that approval that TWT investigate and assess the sandstone within the site boundaries to see whether there was any that could be salvaged and re-used (per McDougall J at [6]). TWT contracted with Cenric to carry out demolition and excavation work. Cenric subcontracted to Bundanoon the task of harvesting the sandstone and to arrange its sale to the NSW Department of Finance, Services and Innovation. In effect, Bundanoon acted as Cenric’s agent, or possibly TWT’s agent, to harvest the sandstone and arrange its sale.

7. [7]

   The Department has the right of first refusal over the sandstone. The Department usually acquires sandstone harvested from sites such as the Pyrmont site and uses it to repair and maintain public buildings in Sydney. If the Department does not wish to purchase the sandstone, it may be sold into the private market.

8. [8]

   Under the contractual arrangements between the parties, Bundanoon was obliged to pay Cenric a royalty for the sandstone it harvested. That royalty varied between $500 per m3 and $1,000 per m3 depending on the quality of the sandstone. It was payable no matter what price Bundanoon achieved on sale.

9. [9]

   McDougall J determined the dispute substantially in Cenric’s favour and entered judgment against Bundanoon in the sum of $3,958,651.08. His Honour concluded that this was the amount due from Bundanoon to Cenric for unpaid royalties for the sandstone.

10. [10]

    His Honour also declared that Bundanoon held on trust for Cenric “all sale proceeds resulting from the sale of [TWT’s] sandstone” from the site to be distributed in accordance with the contractual arrangements between the parties.

11. [11]

    During argument on this application, I was told that it ceased to be an issue at the outset of the hearing before McDougall J (that is at the end of July or early August 2018) whether Bundanoon held the proceeds of sale on trust.

12. [12]

    Bundanoon has appealed McDougall J’s decision. Bundanoon does not challenge its obligation to pay $566,426.97 of the $3,958,651.08. Nor does Bundanoon challenge McDougall J’s finding that Bundanoon holds the proceeds of sale on trust for Cenric.

13. [13]

    On 7 November 2018 Macfarlan JA ordered that McDougall J's judgment be stayed pending the appeal to the extent it exceeded $566,426.97. Macfarlan JA granted the stay on the basis that Bundanoon cannot pay the amount of the judgment and, if it goes into liquidation, the appeal will be stultified: Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd [2018] NSWCA 256.

14. [14]

    Cenric renews its application for a freezing order on two bases.

Breach of trust

1. [15]

   The first basis arises from the agreed fact that Bundanoon holds the proceeds of sale of the sandstone on trust for Cenric.

2. [16]

   On 7 June 2018 Bundanoon wrote to its solicitors stating that it had by then harvested 1,155 blocks from the Pyrmont site, had sold 597 blocks to the Department and had received from the Department some $5.1 million.

3. [17]

   On 20 June 2018 Bundanoon’s solicitors wrote to Cenric’s solicitors accepting, indeed asserting, that Bundanoon had intermingled payments received from the Department (now agreed to be trust funds) with its own funds.

4. [18]

   On 26 October 2018, shortly after delivery of McDougall J’s judgment, Cenric’s solicitors drew these matters to the attention of Bundanoon’s solicitors, recorded Bundanoon’s admission, and McDougall J’s declaration that Bundanoon was a trustee of the sandstone sale proceeds and stated:

5. [19]

   On 2 November 2018 Bundanoon’s solicitors replied:

6. [20]

   Mr Ashhurst SC, who appeared for Bundanoon accepted that “if [Cenric’s] case survives the Court of Appeal, then there will obviously be a breach of trust claim, something in the order of four million dollars”.

7. [21]

   In those circumstances, Mr Newlinds SC, who appeared with Ms Thrift for Cenric, submitted that a freezing order was justified because of the “apparent strength” of Cenric’s case that Bundanoon, its parent Troy Stratti Pty Ltd, and Mr Stratti himself “are all people who have been involved in a serious breach of trust”. The submission continued:

8. [22]

   The submission continued:

9. [23]

   I am not in a position, at this stage, to determine whether these serious allegations have been established.

10. [24]

    As I have said, Mr Ashhurst accepted that a prima facie case of breach of trust has been established, subject to Bundanoon’s appeal.

11. [25]

    However, it does not follow that a freezing order should now be granted on this basis.

12. [26]

    The matters of complaint have been known by both parties for some months.

13. [27]

    The only developments that are “new” are that McDougall J has made a declaration about that matter; and that Bundanoon’s solicitors have given the somewhat unhelpful response set out above to Cenric’s solicitor’s enquiries about the steps that Bundanoon proposed to take to “reconstitute the trust property”.

14. [28]

    I do not see these matters as reasons now to make a freezing order.

15. [29]

    They may have justified such an order if one had been sought earlier in the year, as soon as the matters referred to in [18] and [19] became known, or perhaps once the existence of the trust became common ground (see [11] above).

The “processing” of the sandstone

1. [30]

   The second basis on which Cenric seeks a freezing order arises from the fact that the sole director of Bundanoon, Mr Troy Stratti, has within the last month taken steps to “process” the sandstone blocks in Bundanoon’s possession.

2. [31]

   The sandstone harvested at Pyrmont is high quality restoration sandstone. Before Mr Stratti “processed” the sandstone it was in large blocks suitable for building restoration. Now “processed”, it is in much smaller pieces that are much less valuable and useful only for landscaping.

3. [32]

   Mr Ashhurst read an affidavit of Mr Stratti in which he gave this evidence as to the instructions he gave his site crew in early November 2018 concerning the “processing” of the stone:

4. [33]

   Mr Stratti explained what he had done by reference to a conversation he claims to have had with a Mr Gavin Zhang, a director of TWT, on 2 November 2018.

5. [34]

   According to Mr Stratti, the conversation was as follows:

6. [35]

   However on 28 November 2018 Mr Zhang sent an email to Mr Steven Tambouras, a contract administrator at Cenric:

7. [36]

   Mr Stratti’s explanation to Mr Zhang for “processing” the sandstone in November was that “because of the court proceedings” the Department was no longer “at this point in time” prepared to purchase sandstone from Bundanoon.

8. [37]

   But on his own account of it, Mr Stratti had known this since May 2018. In his affidavit, the only evidence offered by Mr Stratti about his dealings with the Department is an email he received from Mr Paul Thurloe, the Stonemasonry Manager, Heritage Stoneworks for the Department on 30 May 2018 as follows:

9. [38]

   Mr Stratti said:

10. [39]

    On the other hand, Mr Newlinds read an affidavit of Mr Tambouras who deposed to a conversation on 11 November 2018 between his father, Mr Bill Tambouras, a director of Cenric, and Mr Ronald Powell.

11. [40]

    Mr Powell is semi-retired architect, landscape architect and stone consultant who was employed as the manager of the NSW Government’s Minister’s Stone Program.

12. [41]

    Mr Powell has also sworn an affidavit disputing the accuracy of part of Mr Tambouras’s account of the conversation.

13. [42]

    However, Mr Powell did not dispute that he said the following in response to Mr Tambouras’s question “has [Mr Stratti] ever said to you that he is not allowed to sell anymore stone to the government”:

14. [43]

    Nor did Mr Powell dispute that he said to Mr Tambouras that he had spoken to a Mr Bruce Pettman at the Department who had told him “the Government actually has money to buy more stone” and that he, Mr Powell, also said:

15. [44]

    Cenric’s solicitor Mr Nakousis has deposed to a conversation with Mr Powell on 14 November 2018 in which Mr Powell said:

16. [45]

    Mr Stratti thus explained to Mr Powell that he intended to “reprocess” the sandstone so that smaller pieces could be sold to satisfy the judgment entered for Cenric by McDougall J.

17. [46]

    Further, Mr Powell’s account is that this “reprocessing” resulted in the Department not wishing to acquire further sandstone from Bundanoon; and not that the “reprocessing” occurred because the Department did not wish to acquire it.

18. [47]

    Mr Newlinds submitted that Mr Stratti’s conduct should be considered in light of the following finding made by McDougall J concerning an event which occurred in November 2017:

19. [48]

    The “processing” of the sandstone blocks has had a significant effect on the value of the sandstone.

20. [49]

    Mr Newlinds read an affidavit by Mr Rick Timperi, a stonemason, who said:

21. [50]

    Mr Powell told Mr Nakousis that reprocessed sandstone “might be worth only $40-50 per cubic metre”.

22. [51]

    Bundanoon does not own the sandstone. But Bundanoon must pay a royalty to Cenric as stipulated in the contracts (see [8] above) no matter what price it achieves on sale. That royalty ($500 to $1,000 per cubic metre) is a good deal less than the price Bundanoon could achieve selling the sandstone in blocks as restoration sandstone ($2,500 to $3,000 per cubic metre) but very much higher than the price for sale as landscaping sandstone (between $40 and $130 per cubic metre).

What must be shown?

1. [52]

   The matters that must be demonstrated to justify a freezing order have been stated in many cases.

2. [53]

   A convenient summary is that of McColl JA in Samimi v Seyedabadi; Seyedabadi v Samimi [2013] NSWCA 279 at [72] to [75]:

Should a freezing order be made by reason of the sandstone “processing”?

1. [54]

   There are a number of possible explanations for Mr Stratti’s conduct.

2. [55]

   One is that Mr Stratti is telling the truth when he says the Department will no longer purchase sandstone from Bundanoon. That appears to be the effect of Mr Thurloe’s email of 30 May 2018 (see [37] above).

3. [56]

   But it seems improbable that Mr Thurloe’s email led Mr Stratti, six months later, to cause the sandstone to be “processed”. And there is evidence pointing to the improbability that Mr Stratti’s decision stemmed from recent communication with the Department (see [42] to [46] above).

4. [57]

   It seems more likely it was the entry of McDougall J’s judgment that led to this decision. That is Mr Stratti’s evidence (at [34] above) and Mr Powell’s evidence (at [44] above).

5. [58]

   Another explanation is that Mr Stratti simply made a very poor business decision. That seems unlikely. Mr Stratti is deeply experienced in the sandstone harvesting industry. He must know, as Mr Powell has confirmed, that even if the Department no longer wished to purchase sandstone from Budnanoon the blocks could be sold on the private market.

6. [59]

   Another explanation is that Mr Stratti has decided deliberately to reduce Bundanoon’s income stream from sandstone sales with the object of ensuring that Cenric’s judgment, to the extent that it is not stayed, will not be satisfied. As Mr Newlinds emphasised, that conclusion would be congruent with McDougall J’s findings concerning Mr Stratti’s conduct in November 2017 (see [47] above).

7. [60]

   That would attribute to Mr Stratti a preparedness to act contrary Bundanoon’s interests and in a commercially irrational fashion. I understand that, through the second defendant, Troy Stratti Pty Ltd, Mr Stratti owns all the shares in Bundanoon. If he is motivated by a determination to thwart Cenric’s entitlement to enforce its judgment, he really would be “cutting off his nose to spite his face”. However, as Mr Newlinds pointed out, he has been found to have done that before, albeit not on the scale suggested here.

8. [61]

   In my opinion, the most likely explanation for Mr Stratti’s conduct is that it was calculated to thwart Cenric’s enforcement of that part of McDougall J’s judgment as is not stayed.

9. [62]

   Although the “processing” has already occurred to some blocks on the site, I find this to be “direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on” (to use Mustill J’s words in Nimemia) and that there remains a danger that Bundanoon may continue to diminish its income stream such that it would not be able to satisfy the judgment for Cenric.

10. [63]

    This would have the effect of defeating the Court’s jurisdiction.

11. [64]

    I find there is “solid evidence” (again adopting Mustill J’s language) pointing to this conclusion, and that a freezing order should be made for that reason.

Conclusion

1. [65]

   I propose to make a freezing order. I will hear submissions as to its form, including as to what provision should be made for Bundanoon’s reasonable costs for prosecution of the appeal. The order should make provision for Bundanoon to apply on short notice to seek to have the order dissolved, should circumstances change.