P & O Services (NZ) Ltd v Accident Rehabilitation and Compensation Insurance Corporation

IN THE DISTRICT COURT Decision No. 16 1 /97 HELD AT WELLINGTON IN THE MATTER of The Accident Rehabilitation and Compensation Insurance Act 1992 AND IN THE MATTER of an Appeal pursuant to Section 91 of the Act BETWEEN P & O SERVICES (NZ) LTD Appellant (Appeal No. DCA 243/96) AND ACCIDENT REHABILITATION AND COMPENSATION INSURANCE CORPORATION a body corporate duly constituted under the provisions of the said Act Respondent HEARD on the 20th day of May 1997 APPEARANCES B W F Brown for appellant P J Zumbach for respondent A G Sherriff for MidCentral Health DECISION OF JUDGE D A ONGLEY This appeal concerns attribution of experience rated employer levies to the appellant which carried on an activity inherited from a previous employer, MidCentral Health Limited (MidCentral). P & O Services (NZ) Limited conducts the business of a hotel services provider formerly carried on by Command Pacific Limited. For the purposes of this judgment there is no need to distinguish between them and both will be referred to for convenience as P & O. MidCentral invited tenders by means of public advertisement for the provision of its food, cleaning and porterage services, known as hotel services. The process of tendering for the hotel services business began in February 1994 with expressions of interest. P & O responded in March 1994 and tender documents were prepared. The tender documents concerned a proposed contract for the services - 2- which were to be supplied, along with ancillary documentation concerning the leases of buildings or parts of buildings and disposition of plant and equipment which MidCentral was then providing for its own purposes. The invitation to tender was entitled "For the provision of commercial support services for MidCentral Health Limited" an expression upon which the appellant placed some significance because the use of the the word "for." rather than "to" might be thought to reflect a subcontractual relationship rather than a lateral relationship of separate activities independently contracted to MidCentral. The period of the proposed contract was three years with two rights of renewal for twelve months at a time. Part 2 of the tender documentation required the contractor to provide an "immediate response service" to provide stipulated services on the basis of a one hour response time, twenty four hours a day throughout the year. MidCentral undertook to provide to the contractor a lease of parts of hospital buildings, access to amenities, power and water supplies, storage areas and telephones. Materials and equipment were to be at the contractor's cost but the contractor would have the option of purchasing existing materials and equipment from MidCentral. The purpose of the tender was explained at the review hearing by Mr G W Small as follows: "Now what was important from MidCentral's point of view was to reduce fiscal deficits in our operation. The provision of hotel services was not part of our core business. We expected to be able to do this by contracting out the service, the provision of these services to those experienced in the business of providing such services. In negotiation, no negotiation, consultation, due diligence process was quite lengthy. It commenced, as I say, with expressions of interest in March 1994. The appointment of Command as the successful tenderer was not approved by the Board of MidCentral until 9 September 1994. During the intervening six months there were a number of contacts between myself on behalf of MidCentral, various tenderers including Command and the P & O Catering division visited our hospitals in April 1994. Command were shortlisted at an early point and invited to inspect plant and premises and that occurred. They put in a formal presentation of their tender for the company on 4 August. Notes of that meeting confirmed that at that meeting the question of ACC and experience rating premiums was mentioned by MidCentral to Mr Drake." An internal memorandum of 5 October 1994 from Mr W Ward to Mr P Johnston of P & O on the subject of "MidCentral Startup" dealt with the question of GST liability of the transaction as follows: "GST CONSIDERATIONS The position is reasonably straight forward: - if a business is sold as a going concern then it is zero rated for GST when it is sold by one registered entity to another. The emphasis being on 'going concern' which under taxation legislation means 'sold lock stock and barrel' with NO change to the business activity - clearly this does not apply to our contract. - 3- The sale of the assets to us from the CHE clearly attracts GST at 12.5% as will the invoicing of Holiday Pay etc but it has a cash flow effect only." The memorandum preceded execution of the contract documentation which was dated on 5th and 6th December 1994. The sale and purchase agreement relating to plant and equipment was eventually drafted to express an understanding between the parties, contrary to the appellant's internal October memorandum, that the transaction was a transfer of a going concern. That agreement contained the following provision in cl 5: "The Parties acknowledge that this Contract is collateral with the Leases and the Agreement for Sale and Purchase to be entered into by the Parties and accordingly the Parties further acknowledge that the Contract, the Leases and the Agreement for Sale and Purchase shall not come into force or be of any effect until all of them, this Contract, the Leases and the Agreement for Sale and Purchase have been signed by both Parties." Whether or not GST was to be payable did not alter the overall consideration paid by P & O, but had a cash flow significance only. The internal memorandum of 5 October might have reflected a failure by the staff of P & O to direct their attention to the possibility of incurring liability for experience rated accident compensation levies as well as GST, because the prospective liability for experience rated levies would have created an unrecoverable trading cost. The question of experience rating had been mentioned at the meeting on 4 August 1994, referred to in the above passage in Mr Small's evidence, when it was only one of a wide range of topics discussed. It was then left to be considered at a later date, but it seems to have been lost sight of at the time of signing contract documents, at least that is suggested by the two documents above referred to which indicate that a decision whether the transaction was a transfer of a going concern was considered only in connection with GST liability. The argument on this appeal demonstrates that the position was not as straightforward as the author of the internal memorandum supposed it to be. P & O began operating as the hotel services provider to MidCentral from 6 December 1994. There was no break between termination of the provision of MidCentral's internally provided services and the commencement of the same services provided to MidCentral by P & O. Continuity was required because of the nature of MidCentral's principle activity as a health provider. In April 1995 MidCentral wrote to the Accident Rehabilitation and Compensation Insurance Corporation setting out details of services previously conducted by MidCentral which had been "sold and contracted back from third parties". Those comprised a laundry activity, ground services, sale of the ambulance fleet, and the hotel services contract with Command Pacific (NZ) Limited, later P & O. Each of the other services was contracted out to a separate provider. The letter, from Mr E G Kirkcaldie, chief accountant of MidCentral, finished: "I trust this provides the information you require to remove these accidents from our claims history. However should you require further information/clarification, please don't hesitate to contact me". - 4- On 23 June 1995 the Corporation's national accounts manager informed MidCentral that the documentation provided was "very good" and "prima facie established the case to transfer the claims". Ms Petersen, the national safety manager of P & O responsible for health and safety concerns, said at the review hearing which was held on 11 June 1996: "I had nothing to do with the negotiation or execution of the contract for hotel services entered into between Command Pacific New Zealand Ltd now P & O and MidCentral Health Ltd. I first became involved in this matter when Craig Dixon of ACC called me on 14 August 1995. Mr Dixon has been the contact person at ACC for Command Pacific's file and I have dealt with him on a number of occasions prior to 14 August. He said to me that it looked as though we had a bit of a problem. He said he had just been contacted by MidCentral and thought there might be a re-attribution issue. He read out a section from the contract which referred to a going concern and stated that it looked as though Command Pacific had made a contract to buy part of MidCentral's business as a going concern. Mr Dixon then said to me that because of that contract Command Pacific had taken over the liability for MidCentral's ACC claims costs and that the costs for the period 1 April 1994 to 31 March 1995 totalled $218,000. He said further this would be costed into our loading which would be calculated in February 1996 and paid in November 1996 and then ongoing. This news came as a total shock to me. As I say, prior to this phone call the issue of re-attribution had never been raised with me, either by ACC, MidCentral or any staff member within P & O. I recall being quite annoyed because in many of the contracts P & O had entered into it had taken on staff from the client and this was to my knowledge the very first time that re-attribution had ever been raised. I recall asking Mr Dixon if he had read the rest of the contract. He said he hadn't. I asked him how he could make a decision regarding re-attribution without looking at the whole contract and he said that he was proposing to look further into the issue and would be sending me out a letter." and further: "I next spoke to Craig Dixon on 21 August. I advised him that under the contract MidCentral was required to buy back the assets at the end of the contract period or at any earlier time if the contract was terminated. Craig Dixon said that that was relevant and asked whether or not GST was paid. He said that if GST was paid Command Pacific would be in a stronger position. He also asked whether Command Pacific was carrying out the same service as that which the hospital previously carried out. I said that I would look into those issues. On 25 August 1995 I again spoke to Craig Dixon. He advised me that there would be a letter coming out to us the following week detailing his intention to re-attribute claims costs from MidCentral to P & O. Craig Dixon advised me that given MidCentral would be repurchasing the assets at the end of the contract MidCentral would in his view be in the same position as us at the end of the contract and re-attribution would occur from P & O to MidCentral." The above extracts do not directly affect the question before the Court on this appeal, but they assist to complete the narrative of events. The question of reattribution at the end of P & O's contract is germane to the issues arising on this appeal. Mr Brown - 5. challenged the assumption that reattribution would occur, because any subsequent transaction would itself have to be examined to see whether it comprised the transfer of an activity as a going concern. There could be no reattribution to MidCentral merely for general reasons of fairness and, of course, nothing was provided in the contract specifically to address the question. Depending on arrangements made at the end of P & O's contract in relation to plant, equipment, staffing and other matters, MidCentral might not take over P & O's activity as a going concern, with possibly a manifestly unfair consequence of P & O continuing to carry the experience rating inherited fom MidCentral. On 9 December 1995 the Corporation made a decision to attribute to P & O the premium loading in respect of the work accident claims made in respect of that part of the business of MidCentral which it considered to be carried on by P & O. The decision was preceded by a letter of 24 August 1995 from the Corporation to the national safety manager of P & O. The letter referred to the sale and purchase agreement as being evidence that the activity was transferred as a going concern and indicated that a decision on attribution of qualifying work injury claims would shortly be made by the Corporation. The tenor of the letter is that the sale and purchase agreement was central to the Corporation's classification of the transaction, and Mr Brown submitted that it demonstrated that the Corporation looked only at one document rather than evaluating the whole of the circumstances and the transactions between MidCentral and P & O to ascertain whether reg 6 of the Accident Rehabilitation and Compensation Insurance (Experience Rating) Regulations 1993 applied. A telephone discussion on 25 August between Ms Petersen and Mr Dixon is described in a passage from the review transcript already referred to. The contract documents consisted of a long contract for provision of hotel services, the sale and purchase agreement, and a lease. The main contract stated that none came into force until all of them had been signed by both parties. The main contract also expressed an order of priority in which they were to have effect in the event of conflict or inconsistency. In that order of priority the main contract was listed first and the sale and purchase agreement was listed last, after agreed correspondence, a pricing schedule, general conditions, work specifictions, tender documentation and the lease. Furthermore, the sale and purchase agreement did not express the whole arrangement concerning the assets which were affected as follows by cl 19.6 of the main agreement: "MidCentral shall on the expiration or termination of the Contract re-purchase from the Contractor all plant and equipment, consumables and other assets purchased by the Contractor from MidCentral under the sale and purchase agreement, together with any assets purchased by the Contractor in substitution for such plant, equipment and other assets, and will also purchase any food, consumables and other stock which exist at the expiration or termination. For the avoidance of doubt Clause 19.4 to 19.12 shall survive expiry or termination of the Contract." Clauses 19.7 to 19.12 went on to provide a formula for disposal of surplus plant in the event of closure of facilities by MidCentral or the approval of a cook-chill service. The formula involved re-deployment of plant and equipment at other MidCentral - 6- facilities, or sale at depreciated book value or market value, failing which MidCentral was to have an election whether to purchase at depreciated book value. The contract provided for payment of sums equivalent to annual depreciation by MidCentral to P & O during the duration of the contract, so that MidCentral would eventually buy back the plant and equipment at the same cost at which it was initially purchased by P & O. Clause 19.7.4 obliged P & O to account to MidCentral for any price received in excess of book value, and to receive reimbursement from MidCentral for any loss under book value. The contract expressed similar adjustments in respect of the price to be paid to P & O for the plant and equipment on termination of the contract. Therefore, the arrangements between the parties with respect to transfer of plant and equipment were not typical of a transfer of a business as a going concern. The differences were connected mainly with the intent of the parties to place disposition of the activity under the control of MidCentral on expiration of the contract period. Hence the buy-back of plant and equipment and special provisions concerning staffing were incorporated. Premises reverted naturally on expiry of the lease, and the benefit of the contract would come to an end, MidCentral resuming exclusive control over the activity. A witness at the review hearing testified that about 350 staff were taken on by P & O including about 270 permanent staff and 80 casual staff. The Review The review hearing was conducted on 11 June 1996 and the Review Officer's decision was given on 8 July 1996, confirming the decision of the Corporation. The Review Officer focused particularly on the sale and purchase agreement which concerned mainly the plant and equipment involved in the hotel services operation, referring to cl. 5 in particular. Counsel were generally in agreement that it is necessry to examine the substance of the transaction rather than the form in which the parties chose to express themselves. It is to be remembered that cl 5 was inserted in an agreement which, taken on its own, appeared to relate only to a sale of plant and equipment. The parties may well have had an understanding as to the classification of the transaction for assessment of GST but they provided for the purchase price to be GST exclusive in case of assesment of the transaction attracting GST, and because s 11(1)(c) of the Goods and Services Tax Act 1985 requires, for zero rating, both that the supply comprises a going concern and that the parties agree in writing that it is a supply of a going concern. The provision was necessary to ensure that the price for plant and equipment was not unexpectedly reduced by a GST assessment. With cl 5 in the contract, if GST was assessed the fiscal consequences for the parties would relate only to cash flow and would not affect the purchase price. No provision was needed in the other documents, probably because the GST possibility that was envisaged affected only the price paid by P & O for plant and equipment The reasons for the apparent understanding by the parties of the nature of the contract are not determinative of the question whether it was in fact part of a group of transactions transferring an activity as a going concern. In the end, the question whether the transaction should be zero rated turns on the substance of the transaction judged objectively; CIR v Smith City Group Lid (1992) 17 TRNZ 49, TRA Case 34 (1993) 18 TRNZ 144, Barratt v CIR (1995) 20 TRNZ 164, 171. All counsel accepted - 7- that the principle of examining the substance of the transaction should be no different when determining its character for the purpose of reg 6 of the Experience Rating Regulations. The considerations to be taken into account in interpreting reg 6 are so closely similar to GST zero rating considerations that the same outcome is likely and counsel did not suggest otherwise. Mr Sherriff submitted that it would be inappropriate for a transaction to be classified as a transfer of an activity as a going concern for GST purposes but not for purposes of attribution of qualifying claims for experience rating of Accident Compensation levies. The Experience Rating Regulations The power of the Corporation to re-attribute qualifying claims from one employer to another is derived from reg 6 of the Experience Rating Regulations, the relevant parts of which are as follows: 6. Reattribution of claims to another employer - (1) The purpose of this regulation is to enable the Corporation to attribute as many qualifying claims associated with one employer as possible to another employer where all or part of an activity or another activity carried on by that first employer has subsequently been carried on by that other employer or where the 2 employers are or were related or connected, to the intent that the financial costs to the Corporation of such claims are borne by that other employer and not by all employers generally. (2) Notwithstanding that a qualifying claim is, or is deemed to be, attributable to an employer or, in the case of a company which is a member of a specified group would, but for the application of regulation 12 (1) (c) of these regulations, be or be deemed to be attributable to that employer (referred to in this regulation as the first employer), the Corporation may deem that qualifying claim to be attributable to one or more other employers, or to such other employers and the first employer (together referred to in this regulation as the second employer), with effect from such time as the Corporation may specify, if the qualifying claim related to a personal injury by accident or work injury that occurred in the course of employment which - (a) Was in respect of an activity carried on by the first employer where all or part of that activity has been transferred as a going concern to the second employer; or (b) Was with the first employer where the first employer was a company which is or has at any time within the preceding 5 years been a member of the same group of employers as the second employer; or (c) Was in respect of an activity at any time carried on by the first employer where - (i) All or part of another activity has been transferred as a going concern by the first employer to the second employer; and (ii) The first employer is not a member of a specified group for the premium liability year in which the transfer occurs, and (ifi) Following the transfer, the first employer does not carry on any other activity as a going concern; or - 8- (d) Was with the first employer where the second employer has an economic interest in the first employer or where the same person or persons directly or indirectly, or through any one or more interposed companies, have an economic interest in the first employer and the second employer. (3) Where the Corporation is satisfied that an arrangement has been entered into between the first employer and the second employer for a purpose, which is more than an incidental purpose, of avoiding the application of subclause-(2) of this regulation, the Corporation may deem any transfer to the second employer of all or part of an activity carried on by the first employer to be a transfer of all or part of that activity as a going concern. (4) Where, pursuant to subclause (2) of this regulation, the Corporation has deemed a qualifying claim to be attributable to the second employer, the Corporation may attribute that qualifying claim back to the first employer where the second employer has ceased to pay or provide earnings as an employee, and may alter any assessments made under regulation 21 of these regulations in respect of the first employer and the second employer accordingly. ........ The question in this case is whether the activity carried on by P & O had been transferred to it as a going concern. The words "transfer" and "activity" are not defined in the regulations nor in the Act. The word "activity" does not pose any difficulty in this case. Plainly it is the provision of hotel services formerly carried on as an ancillary part of the business of MidCentral and later carried on by P & O. It is the whole concept the transfer of the activity as a going concern that causes difficulty The appellant submits that there was no transfer, but rather MidCentral elected to obtain by contract from an outside source certain services which were ancillary to its primary function. The arrangements were similar in many ways to a contract for services. The contrasting view is that it transferred an interest in its own property in order to close down the ancillary activity it was conducting and to enable P & O to conduct a similar activity under contract to MidCentral. Mr Brown contrasted the transaction in this case with a transaction that would clearly amount to transfer of an activity as a going concern, for example the sale of the whole activity of a single hospital. He also suggested a case comparison with another divesting operation such as a pilotage operation conducted by a port company until selling its tugs to an independent entity which contracted pilotage services to the port company. Analogies introduce the usual difficulty of distraction from the facts of the instant case. This case falls between the two different examples and it may differ from the second example, because of the contractual control that MidCentral exercised in order to ensure continuity of the hotel services activity in substantially the same form as it had been conducted as an in house operation. The transaction in this appeal is defined by two points in particular, namely the continuity of the activity, referred to in argument as the "one day next day" feature, and an exclusivity provision in the contract. Mr Sheriff relied on the aspects of continuity and exclusivity as important characteristics of this transaction. Continuity can be viewed in one sense as a merely - 9- incidental feature dictated by the need to keep the hospitals functioning without interruption. However, it is also an element of the contractual arrangements, and so is a feature of the contracts and not just an external fact. There was a carefully designed lead in period to enable P & O to commence operating on 6 December 1994 and P & O was bound by the contracts to do so. A metaphor that suggests itself, from the planned lead in period and overnight transfer of the activity, is that of a relay racer taking over the baton. From that kind of analogy it is inviting to classify the changeover as the transfer of a going concern. Certainly, the external appearance of the transaction bore that resemblance. The appellant is compelled to dissect the contract documents and surrounding circumstances and show that there is another reasonable construction. To fall within reg 6 there must be more than just a transfer of responsibility, because that would obviously occur also in the case of an independent contract for services. It is the transfer of an activity as a going concern that is in issue and Mr Sheriff submitted that it is an important feature that the hotel services activity was maintained without closure by MidCentral, then transferred by virtue of handing over responsibility along with benefits and costs, premises, plant and equipment and staffing; a going concern which continued to function without any essential change when it was assumed by P & O. As to exclusivity, Mr Sheriff submitted that is a relevant feature, because the activity provided services to a single client and continued to do so, in a similar fashion to a business that changes ownership along with its client list and established goodwill. The transaction needs to be examined to discover what other characteristics it bears that are typical of the transfer of a going concern, or conversely whether it lacked characteristics that are typical of that kind of transaction. The appellant submits that a feature that is often significant, but which was lacking in this case was that of access to the books of the operation and the exercise of due diligence. In this case there were no books for the hotel service operation. If there had been, MidCentral's liability for experience rated premium would probably have been noticed immediately because it would have been a cost in the 1994 tax year. The appellant possibly did not regard itself as taking over hidden liabilities. Mr Sherriff's response to that was to refer to page 35 of the review transcript where a witness for the appellant conceded that the process between March and December 1994 could fairly be described as a long process of due diligence. The transcript also contains reference to a checklist of matters, including ACC experience rating, to be mentioned on behalf of MidCentral in the meeting of 4 August 1994. The minutes which I have referred to show that it was breifly mentioned and deferred. There was therefore a process similar to the exercise of due diligence although there was no provision for it in the contract documents. Appellant's argument The principal submissions of the parties are briefly summarised in the following way. Counsel for P & O submitted: 1. The review officer placed undue weight upon the sale and purchase agreement relating to the assets and failed to consider the totality of the evidence. - 10 - 2. The appellant did not take over the activity as a going concern but contracted with MidCentral to provide essentially ancillary functions of food services, cleaning services and orderly services. For that purpose MidCentral provided use of premises and transferred assets but only to be effective for the duration of the contract to provide services to MidCentral. The arrangement was little more than an independent contract for provision of ancillary services, but it was convenient for both parties to use the same plant, equipment and premises. 3. The Corporation made its decision on the basis of information given to it by MidCentral and the information was incorrect in some vital respects. 4. It is essential to consider what consequences will flow at the end of the contract because there is a possibility that the burden of qualifying claims for premium loading may not be attributed to MidCentral nor to another contractor which takes over the activity of supplying ancillary services to MidCentral. Different fact questions arise concerning the transfer of an activity depending whether or not plant and equipment or other assets change hands. The fact that assets changed hands was merely fortuitous. The focus of the Corporation's decision was on one clause contained in an agreement which related only to the assets and not to the whole transaction. In the future, the components of the return of the business activity to MidCentral, or its transfer to some other entity may be quite different and might not result in attribution of qualifying claims. 5. The expression "going concern" is not one with a generally accepted meaning. It is defined in the Shorter Oxford Dictionary as "a business in operation and thriving" It has been considered in a number of decisions under s 11(1)(c) of the Goods and Services Act 1985. In Variety Leisure Corporation v District Commissioner of Inland Revenue (1988) 12 TRNZ 246, 248, the words were held to be descriptive of the state or condition of a business or undertaking at a particular time. In Allen Yacht Charters Limited v CIR (1994) 18 TRNZ 833, 841, Tompkins J regarded those words as requiring that the undertaking was still active and operating at the time of the transaction. Tompkins J adopted observations of Barber DCJ in TRA Case 60 in placing emphasis on the business process rather than the structure. In Allen Yacht Charters the assets were acquired but the objector failed to satisfy the Court that they also acquired the business process because none of the indicia were present in the shape of payment for goodwill, transfer of bookings, examination of accounts, taking over of customers, etc. 6. Mr Brown placed reliance on a long passage in the evidence before the review officer given by Mr R N Taylor, an independent financial consultant. Mr Taylor analysed the transaction and the documents and gave the opinion that the arrangement was consistent with a contract for the provision of services and differed in important respects from the characteristics of a business transferred as a going concern. Mr Brown pointed out in particular that there was no reference made in the tender documents to any proposed sale of an activity, there was no acceptance by the appellant of liability for MidCentral's past conduct, there was no opening of the books, no assignment of or payment for goodwill. MidCentral retained a right to re- purchase assets and there was no compulsion for the appellant to take over all or any specified employees. - 11 - 7. The sale and purchase agreement was a provision designed for the benefit of MidCentral Health and did not alter the essential nature of the transaction. The clause classification the transaction as a transfer of a going concern was included for taxation purposes. If it had truly expressed the understanding of the parties it would have been included in the main body of the contract. There is other evidence to indicate that it did not express the understanding of the parties. The appellant does not concede that clause 5 had any effect whatever. 8. The review officer was influenced very much by the sale and purchase agreement, and did not consider the arrangements as a whole, nor did he consider the various indicia of transactions that involved supply of a going concern. 9. The "one day next day" proposition is fallacious because it did not stem from the transaction but was a requirement of MidCentral designed to avoid disruption of services, and that would have happened whether the arrangement was the transfer of an activity or a new independent contract. It does not advance the proposition that there was a transfer of the activity as a going concern. 10. Even if the transaction falls within Regulation 6(2)(a) the Corporation has a discretion whether or not qualifying claims are to be attributed to the appellant. The discretionary power must be exercised in good faith and for the purpose for which it was granted, that is to say with the intent that the financial costs to the Corporation are borne by the appropriate employer and not by all employers generally. The Employers' Guide to Experience Rating 1995 issued by the Corporation emphasises the anti-avoidance aspect of Regulation 6, and it also describes the purpose of experience rating to include a financial incentive for employers to reduce claim costs by improving work place procedures and encouraging employees in rehabilitation. Therefore employers with good safety and accident records receive a benefit, while those with poor records are penalised. The transaction in question is similar to a restructuring arrangement, and attribution of the claims history to the appellant is not consistent with the purposes and objectives of the regulations because MidCentral absolves itself of a poor claims cost history which in one year alone involves costs in the order of $218,000. MidCentral continues to exist and should bear the relevant claims costs. In this case none of the employees whose accidents give rise to the costs continued to be employed under the new arrangements. The persons concerned were dismissed by MidCentral, and MidCentral should be required to meet their ongoing costs. 11. The appellant's adjustment to experience rating suffered by reason of attribution of MidCentral costs is entirely out of proportion to the number of employees with ACC claims who were engaged by the appellant. The first year claim costs $217,000 included only $31,000 related to persons actually engaged by the appellant. In exercising the discretion the Corporation wrongly took into account that there would be a re-purchase at the end of the contract and MidCentral would resume responsibility for claims history of the activity in question. Respondent's argument The principal submissions of the Corporation may be summarised as follows: - 12 - 1. That the purpose of reg 6 is derived from the regulation making power in s 104(3)(c) of the Accident Rehabilitation and Compensation Insurance Act 1992. Regulation 6(1) does not use the words "transfer" when it states the purpose of re- attributing qualifying claims from one employer to another employer "where all or part of an activity or another activity carried on by that first employer has subsequently been carried on by that other employer ...". Therefore a construction should be favoured which does not give a narrow meaning to the word transfer when it appears in reg 6(2)(a). 2. "Transfer" is defined in the Concise Oxford Dictionary to include "convey, remove, handover, .. make over possession of ...". 3. "Activity" in the phrase "taxable activity" is given a meaning in s 6(1) of the Goods and Services Tax Act 1985, generally including a continuously or regularly carried on business, trade, manufacturer, profession, vocation, association or club. The operation in question falls squarely both within that definition and within the ordinary meaning of the word. 4. "Going concern" was inserted in s 2 of the Goods and Services Tax Act in 1995 to mean: "Going concern", in relation to a supplier and a recipient, means the situation where - (a) There is a supply of a taxable activity, or of a part of a taxable activity where that part is capable of separate operation; and (b) All of the goods and services that are necessary for the continued operation of that taxable activity or that part of a taxable activity are supplied to the recipient, and (c) The supplier carries on, or is to carry on, that taxable activity or that part of a taxable activity up to the time of its transfer to the recipient: The definition may be regarded as a formula to encompass an ordinary commercial understanding of the expression in question. The definition uses tests of separate operation, completeness and continuity. Particularly relevant to the facts in this case is the requirement that all goods and services that are necessary for the continued operation of that taxable activity are supplied to the recipient. Assets, land, premises and staff changed hands and comprised all that was needed for continued operation under P & O's contract. In general terms P & O provided only skilled management and industrial expertise while the observable functioning of the activity did not alter. Before that definition was enacted, the locus classicus was to be found in the judgment of Hardie-Boys J. in Variety Leisure Corporation v CIR (1988) 10 NZTC 5,255 at p. 5,257: "The cases do no more than show that the expression "going concern" means that the particular undertaking is not closed down on sale but remains active and operating before, during and after its transfer to new ownership. And that is simply the ordinary meaning of the words. They are words descriptive of the state or condition of a business or undertaking at a particular time. The basic concept - 13 - is of a business or undertaking; that is one of its ordinary dictionary meanings. I see no reason to abandon that concept when the words are used in the context of this Act." In CIR v Smith City Group Lid (1992) 14 NZTC 9, 140 at 9, 143 Tipping J said: "Thus the activity must be one which can properly be described as a business or undertaking capable of being handed over to the transferee in such a state that it may be carried on by the transferee if he so wishes." 5. That the Review Officer did not confine his considerations to the content of cl 5 of the sale and purchase agreement, but considered a variety of documents. 6. The absence of goodwill and the absence of contractual terms relating to examination of books and indemnity for third party liability are only incidental features of the particular transaction and are not relevant to determination whether the parties transferred an activity as a going concern. MidCentral's argument Counsel for MidCentral submitted: 1. That the hotel services operation was an "activity " capable of separate operation from the core hospital services provided by MidCentral and constituting an activity in which P & O would be separately experience rated as an employee. 2. That the regulations envisaged a "transfer" as including other forms of disposition. That is reflected in the Corporation's Employer's Guide to Experience Rating which referred to part of an activity being "sold or transferred" to another employer. A transfer may include a sale, lease or other process. The significant . attributes of the arrangements that constituted a transfer in the present case were the transfer of property and assets, the transfer of risk, the transfer of employment contracts and the transfer of interests by way of lease. The enquiry then must address the substance of the transaction: Barratt v CIR (1995) 20 TRNZ 164, 171; TRA Case S93 (1996) 17 NZTC 7,581 at 7,586. 3. Regulation 6 of the Experience Rating Regulations considers the practical outcome of the transfer. That is evident from the framework of the regulation which focuses on the consequence of an activity being carried on by one employer and then being carried on by another employer, rather than on the form of the transfer or assignment of rights and property. The method of transfer is not as material as the fact that control of an activity has passed from one employer to another. A bad employer will be exposed by due diligence or express terms of a purchase contract. 4. The transfer of rights and responsibilities on 6th December meant that P & O would thenceforth have the right to carry out the hotel services activity in the same buildings and employing the same staff. Although only the equipment of the business was actually sold, the whole arrangement meant that the activity was transferred. The plant, land, buildings, employees, supply contracts and rights necessary to carry out the hotel services activity all came under the control of P & O. The transfer was complete and nothing further had to be done to enable P & O to carry on the activity - 14 - for its own benefit. If P & O had contracted without obtaining any of the property formerly used in the activity; if it had brought to MidCentral all the wherewithal necessary to provide hotel services, the present dificulty would not have arisen 5. There is no reason to exclude a temporary transfer. Parties to a transfer are free to contract for the activity or parts of it to re-vest in the original owner, but that does not detract from the existence of the initial transfer. 6. Counsel for MidCentral also examined cases decided in relation to "going concern" under s 11(1)(c) of the Goods and Services Tax Act and submitted that the expression in those cases is entirely consistent with the use of the expression in the Experience Rating Regulations. He submitted that the cases before enactment of the definition of "going concern" inserted in the Goods and Services Tax Act in 1995 reflected general principles applicable to reg 6, and that the statutory definition itself adopts many of the tests used in the cases. Of particular relevance is the fact that the transfer occurred on a single day without interruption of services, and the supplier remained the exclusive supplier of hotel services to MidCentral. 7. GST cases indicate that the fact there is no express supply of goodwill will not be determinative: Case P21 (1992) 14 NZTC 4, 148 at 4, 157; Case P22 (1992) 14 NZTC 4, 148 at 4,165. Lack of provision for goodwill fitted with the limited nature of the services provided in the instant case and the restriction on possible consumers of those services. Goodwill in the usual sense could not arise from the activity. 8. Want of provision for opening of the books is not an important feature because MidCentral did not maintain conventional profit and loss accounts in relation to the hotel services branch of its business. A witness for the appellant acknowledged at the review hearing that a process of due diligence did take place between March 1994 and October 1994. 9. A feature of continuity is found in P & O's covenant in cl 8 of the sale and purchase agreement to honour all existing contracts in place with external suppliers of goods and services. 10. The agreements provided for stocktaking, conditions governing stock levels and provisions for holiday pay and redundancy, in a manner typical of a business sale as a going concern. 11. Clause 5 of the sale and purchase agreement, while not capable of classifying the transaction as something it was not, reflected a mutual understanding that the transaction was intended to effect the transfer of a going concern. Conclusions I consider that the fact that the transfer was to be for a limited period of time does not mean there is not a transfer of an activity as a going concern. Regulation 6 of the Experience Rating Regulations addresses an "activity" and the transfer of an activity. The burden moves with the activity in accordance with the purpose expressed in reg 6(1). The derivation of experience weighting is historical but the nature of it is a cost attaching to a business, so it is to be expected that the liability should accompany - 15 - the activity upon transfer from one employer to another rather than attach continuously to one employer. It is evident from s 104 and the Experience Rating Regulations that such is the underlying policy. The wording of the regulations do not support a construction that the burden of premium loading is a penalty for poor employment practice that attaches to the employer who is to blame for the accident. Some accidents will be random events which occur without particular fault on the part of the employer, or independently of any risk that may be inherent in the business activity. Fault is only one factor in deciding premium loading. The cost of premium loading is determined by the continuity of the business activity carrying with it the cost of injury whether or not caused through the fault of the former employer. I find that Regulation 6(2)(a) applies to the transaction. Some of the difficulties in argument are connected with the fact that the activity is an unusual one. It is restricted in its scope to the supply of services to MidCentral and its branches. It enjoys a privilege of exclusivity but it deals with one client only. Nevertheless it is quite apparent that it is an activity and, at least during its day to day conduct, it operates as a going concern. The difficulties arise with the concepts of "transfer" and "transfer as a going concern". The first question is not difficult to resolve once the substance of the transaction is viewed. While the transaction lacks some characteristics of a normal contract for sale of a business, its substance is plainly the transfer of an activity from the control of one entity to another. The appellant derives benefits from control of the activity, although it does not have unconstrained ownership and disposition of the assets. The fact that some employees did not remain is, in my view, incidental because it does not detract from the integrity of the activity as a whole. The final question is whether a going concern was transferred. The structure and process of inter-party transactions is infinitely variable. If this was not a transfer of an activity as a going concern, then it could only be an independent contract for services. The transaction involved both because once the restructure was completed then the appellant operated under a contract to supply services to MidCentral. The transfer of the process used for the supply of those services can be viewed in terms of an overall activity or in terms of its separate components. The answer depends on substance and degree. If only some of the components passed from the control of one entity to the control of another, the answer may be different, but I am satisfied on the material before the Court that the activity survived intact, that it was not closed down but continued uninterrupted and that it was transferred as a going concern. Dangers exist that when the contract reaches an end there may be a different kind of transaction in disposing of the assets or the activities. The appellant will have to take care to see that its objects are achieved. In respect of the present transaction, it has suffered the burden of what appears to be an unexpected level of premium loading. If that has been brought about by some representation or lack of disclosure by MidCentral, then the remedy lies in another jurisdiction. The discretion Mr Sherriff submitted that the discretion was properly exercised because reg 6 contemplates that the levy for cost of claims will follow the activity rather than - 16 - remaining with a former employer, or lapsing and then being borne by employers generally in the funding of the Employers' Account constituted under Part VII of the Accident Rehabilitation and Compensation Insurance Act 1992. Where the activity continues as a going concern there is no reason to depart from the scheme of the regulations by exercise of the discretion in some other fashion. Mr Sherriff Referred to Fletchers v Commerce Commission (1986) 6 NZAR 33,37 per Davison CJ (HC) as wuthority that unless the Court is satisfied that the discretion has been exercise on a wrong principle, or that it has not been exercised at all, or there has been a miscarriage of justice the Court should not interfere with the Corporation's decision. I accept that Mr Sherriff's submission is correct. The Corporation does not have any duty to adjudicate between past and present employers to achieve fairness between them in the event of their own omission to expressly address the question of contractual liability for experience rated premiums. That must remain a matter of contract. Uncertainty would prevail if the Corporation exercised its discretion in a manner that cut across contractual provisions. In the present case, so long as the terms of reg 6(2)(a) apply to the transaction it is difficult to envisage circumstances in which the Corporation may be called upon to exercise a discretion not to apply the experience rating to the new employer, expect perhaps in cases where there are special circumstances relating to qualifying claims and where a manifest injustice would result. Discretionary decisions may well arise in other kinds of cases, for example, where material cannot be clearly ascertained. It would be wrong for the Corporation to consider matters that relate to liability between MidCentral and the appellant in contract or in tort. As Mr Brown has correctly submitted, the considerations to be taken into account are those relating to the purpose and intention of Part VII of the Accident Rehabilitation and Compensation Insurance Act 1992 and of the Experience Rating Regulations. In my view, there are no special reasons why the transaction should not result in attribution of claims history to the appellant. There is no argument advanced with respect to individual claims with special features except to the extent that a number of employees with ongoing accident costs left the employment of MidCentral before 6 December 1994. Whether or not those claims should be taken over by the appellant is a contractual consideration and not a consideration that the Corporation need take into account in allocating liability to fund the employer's account. For those reasons, the appeal is dismissed. Costs are reserved and application may be made if there is no agreement between the parties. DATED at WELLINGTON this 7 th day of August 1997 D A Ongley District Court Judge