Cenric Group Pty Ltd v Bundanoon Sandstone Pty Ltd

Breach of trust

1. The first basis arises from the agreed fact that Bundanoon holds the proceeds of sale of the sandstone on trust for Cenric.
2. 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. 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. 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: "As a beneficiary, our client is entitled to full information regarding the trust property: see, eg Re Simersall [; Blackwell v Bray (1992) 35 FCR 584;] 108 ALR 375 at 378-379 (Gummow J). Consistent with this entitlement, our client requires your client to: (a) identify and specify the total amount of sale proceeds that your client has received to date from the sale of the sandstone harvested from 63-71 Harris Street, Pyrmont; (b) provide to us full financial records of your client's dealings with all Sale Proceeds including (but not limited to) the Received Sale Proceeds (which are trust monies); (c) confirm that your client holds the Sale Proceeds as an identifiable fund or, to the extent that your client has failed to do so, identify what steps your client is taking to reconstitute the trust property; (d) confirm whether your client has complied with its obligations as trustee of these sale proceeds and will do so in the future, by no later than midday 30 October 2018." (Emphasis in original.)
5. On 2 November 2018 Bundanoon's solicitors replied: "It would seem that what your client is now insisting upon is detailed trustee's accounts without any specific order from the Court that our client should produce such accounts and at a time when our client's, and our, focus is on the appeal and stay application. We invite you to advise what your client claims is the legal basis for the production of such accounts by our clients at this time, particularly in the context of the above and our letter of 1 November 2018".
6. 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. 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: "The undeniable fact which remains entirely unexplained is that there has been a gross breach of trust by [Bundanoon]. As [Mr Stratti] is the only mind of [Bundanoon], he must have been knowingly involved and procured the breach, and as [Troy Stratti Pty Ltd] and [Bundanoon] appear to have treated each other as 'banker and customer' and transferred funds 'as and when needed' between each other…it must be the case that [Troy Stratti Pty Ltd] (also controlled entirely by [Mr Stratti]) has knowingly received trust funds".
8. The submission continued: "The fact that not only has $4,583,405.21 [sic] been dealt with in breach of trust, it has disappeared entirely... Again, there is evidence of at least impropriety, if not outright dishonesty. The explanation appears to be that the entire group of companies controlled by [Mr Stratti] is treated as if it is one entity. Regardless of the propriety of this generally, it cannot be acceptable to treat assets of an insolvent company, [Bundanoon], in this fashion. Of course, the fact that [Bundanoon] is a trustee of the moneys, makes the conduct even more reprehensible".
9. I am not in a position, at this stage, to determine whether these serious allegations have been established.
10. 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. However, it does not follow that a freezing order should now be granted on this basis.
12. The matters of complaint have been known by both parties for some months.
13. 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. I do not see these matters as reasons now to make a freezing order.
15. 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. 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. 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. 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: "I want the blocks split into halves then quarters and eighths. Do all halves first, then the quarters and the eighths. The line of the chisel is to be in line with the length of the block across the middle so when you push into the middle of the block the splitting is relatively in two equal halves. Do it the same for the quarters and eighths."
4. 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. According to Mr Stratti, the conversation was as follows: "[Mr Stratti]: Gavin as you know, because of the court proceedings, the government is not prepared to continue purchasing the remaining blocks at this point in time. I have spent hundreds of thousands of dollars in transportation and storage because the expiry of the Fig Street licence that Bundanoon had. The blocks that I have are sitting in front of my office at Bundanoon, and are occupying most of our usable space. I have a potential buyer for part of the stone, which I can sell to, but the price is not what the Government was offering. It will also require me to process the blocks into smaller saleable units so that we can sell to a broader market. [Mr Zhang]: I understand Troy, you do the best that you can do." (Emphasis added.)
6. However on 28 November 2018 Mr Zhang sent an email to Mr Steven Tambouras, a contract administrator at Cenric: "It's our greatest astonishment to see and confirm on sandstone storage site last Friday [23 November 2018] that all these sandstone were destroyed one-two weeks ago - which was so called 'processed' by Bundanoon. TWT reserves all its rights to pursue the damage".
7. 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. 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: "Just wanting to avoid any confusion. Following our last meeting on the 23rd May, [where] the sale process was wound up, our scheduled meetings were also brought to a close."
9. Mr Stratti said: "8 This has resulted in Bundanoon being unable to sell any of the sandstone harvested from the Site and being stored at Bundanoon's quarry in Bundanoon, NSW. 9 In order to proceed with the sale of the sandstone Bundanoon was required to undertake a reprocessing of the sandstone in such a way as to make it desirable to the greater sandstone market."
10. 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. 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. Mr Powell has also sworn an affidavit disputing the accuracy of part of Mr Tambouras's account of the conversation.
13. 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": "No. Troy was allowed to sell stone to the government. In fact when he advised me that he was being pushed into a corner, by his description, and one possibility was him - to use your words, processing the stone."
14. 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: "And then the next thing I know that [selling more sandstone to the Department] was not an option. So late last week I had to go back, mea culpa, eat humble pie, go back to the Minister and say 'Sorry I wasted your time. The stone's no longer available for the Government to buy'".
15. Cenric's solicitor Mr Nakousis has deposed to a conversation with Mr Powell on 14 November 2018 in which Mr Powell said: "I did have an indication from Troy Stratti that to meet the demands of the court judgment he might have to, in his words, 'reprocess the stone' by breaking it up into smaller pieces. To me reprocessing of the sandstone in that manner would make it unsuitable [for] further purchase for the government. I wrote a letter to the minister and spoke to Bruce Pettman the manager of the program who said there was no further stone that was suitable for the government to buy". (Emphasis added.)
16. 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. 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. 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: "Mr Stratti's reaction to these events was interesting…(on the evidence of Steven and Mr Kouzinos, which was neither controverted nor challenged), Mr Stratti threatened to destroy harvested blocks of sandstone and commenced to do just that. He used an excavator and a hammer attachment. Three blocks were destroyed. Mr Stratti refused to leave the site, and stayed overnight in the excavator."
19. The "processing" of the sandstone blocks has had a significant effect on the value of the sandstone.
20. Mr Newlinds read an affidavit by Mr Rick Timperi, a stonemason, who said: "The sandstone depicted in the photographs [shown to him] has been randomly broken into smaller and less valuable pieces. This has increased the wastage and substantially decreased the value of the product. The value of the sandstone sold as rubble is a much less valuable product than sandstone blocks. In my experience, I estimate that this rubble would be worth $130 per cubic metre. The sandstone blocks, in block form, are worth $2,500 to $3,000 per cubic metre".
21. Mr Powell told Mr Nakousis that reprocessed sandstone "might be worth only $40-50 per cubic metre".
22. 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. The matters that must be demonstrated to justify a freezing order have been stated in many cases.
2. A convenient summary is that of McColl JA in Samimi v Seyedabadi; Seyedabadi v Samimi [2013] NSWCA 279 at [72] to [75]: "72 The question whether there is a danger that any judgment obtained …, or that already obtained, will be wholly or partly unsatisfied because the owner's assets might be disposed of, dealt with or diminished in value (UCPR 25.11; 25.14(4)(b)) reflects the general law concepts again developed in accordance with Mareva injunctions, that the applicant must demonstrate 'a danger that by reason of the defendant's...assets being...disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied': Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (at 321 - 322) per Gleeson CJ. 73 In Ninemia Maritime [Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG 'The Niedersachsen' [1983] 1 WLR 1412; [1984] 1 All ER 398] (at 406), in a passage effectively approved in Frigo v Culhaci [[1998] NSWCA 88] (at p 8), Mustill J discussed the nature of the evidence the applicant for a freezing order should adduce as follows: 'It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on. ... Or...the plaintiff may be able to found his case on the fact that inquiries about the characteristics of the defendant have led to a blank wall. Precisely what form the evidence may take will depend on the particular circumstances of the case. But the evidence must always be there...'. 74 It is not necessary for an applicant to show that the respondent has a positive intention of evading a judgment, and it is sufficient to show that the course on which the respondent proposes to embark is, objectively speaking, calculated to have that effect: Finn v Carelli [[2007] NSWSC 261] (at [4]). As Brereton J added: 'It is important to bear in mind that the jurisdiction to make orders of this type was never intended simply to enable a plaintiff or judgment debtor to obtain security for its judgment in advance of execution, but was firmly founded on the jurisdiction of the Court to prevent abuses of its process by preventing a defendant or judgment debtor from embarking on a course of conduct which would have the effect of defeating the Court's jurisdiction. It also needs to be borne in mind that the mere fact that a judgment may not be satisfied for reasons of impecuniosity does not mean that there is an abuse of process. Indeed, it has been pointed out on several occasions that the prospect of impending insolvency is not a reason to grant a Mareva injunction [Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545, 558].' 75 Finally, in determining whether a freezing order should be made, the Court must take into account any discretionary considerations, including the balance of convenience." (Emphasis added.)

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

1. There are a number of possible explanations for Mr Stratti's conduct.
2. 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. 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. 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. 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. 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. 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. 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. 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. This would have the effect of defeating the Court's jurisdiction.
11. 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. 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.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 December 2018