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Are You a Director of a Corporation? Do You Know Your Liability?

If you sit on a Board of Directors of a corporation then exposure to liability exists under various statutes. For example, unpaid wages and vacation pay, workplace l

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

iabilities, liabilities under corporate statutes as well as environmental liabilities are a major concern of the corporate director.

Amounts owing to the Crown with respect to taxes are the most common of the liability claims. Unr

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

emitted source deductions which consists of income taxes, employment insurance and Canada Pension Plan premiums from employee wages is the liability that the Crown has been very aggressive in collecting in recent years. The Crown i

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

s also being more aggressive in the collection of other taxes such as unpaid sale taxes and the ever controversial Goods and Service Tax (GST).

A common scenario in creating director’s liability is that a business that is struggli

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

ng financially is using the unremitted source deductions as capital to keep the corporation in business rather than close the doors. However, when the corporation realizes that the unremitted source deductions is not enough capital

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

to keep the operations going, the company goes out of business. Canada Revenue Agency (CRA) has a statutory right to go after the directors for unremitted source deductions plus interest and penalties.

For CRA to successfully clai

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

m against a director it must meet certain requirements under the Income Tax Act. CRA must file a certificate in respect of the corporations tax liability and CRA must attempt to have execution against the corporation and the execut

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

ion must be returned unsatisfied. In the case of a liquidation in bankruptcy, CRA must prove its claim within 6 months of the date of bankruptcy. If these actions have not been met by CRA then the director has no liability.

CRA al

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

so has only 2 years to attempt to collect the liability from the director. If the 2-year period passes then the director escapes any liability for the unremitted deductions. In order to attempt to collect from the director, it must

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

be established that the funds could not be collected from the corporation or from the Receiver or Trustee in bankruptcy.

CRA has first priority on all assets of a bankrupt company. If a company files a bankruptcy CRA has priority

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

over all other secured creditors even those who had security on the assets of a company prior to CRA having a debt owed, such as a General Security Agreement by a banking institution. This priority is given to CRA through the Incom

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

e Tax Act. If the company continues to go forward in a receivership CRA must be paid for any arrears in crown taxes.

There are only a few defenses available to a director in order to avoid payment of the liability. In order to be

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

liable you must be a ‘director in law” at the time the source deductions were not remitted. For example, the individual may not have been properly appointed as a director or may have resigned prior to the failure to remit.

If the

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

above exemptions do not apply then the only defense is the “due diligence” defense as set out in the Income Tax Act. This defense provides that the director is not liable for the corporation’s failure to remit source deductions whe

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

re he/she exercises the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would exercise in a similar situation.

In determining if a director has acted with due diligence the court will lo

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

k at a variety of factors such as, the capability of the person, their business knowledge, education and the actions taken by the director to prevent the failures. The courts have stated that there is a positive duty to take action

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

to prevent the failures.

To prevent failure the director should familiarize himself with the withholding and remittance requirements. Ensure that an appropriate system is in place to withhold and remit all taxes and require on a

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

timely basis written reports to ensure that the remitting procedures are being done correctly.

It is human nature especially for most entrepreneurs to do anything to find away to keep the doors of their company open. This determin

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

ation sometimes leads to the careless use of unremitted source deductions and other government taxes to fund the operations. The courts have said where a corporation reaches the point where it cannot issue a remittance cheque for f

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

ear that it won’t be honored it is time to close down the business. Thus, the mere decision or will of the entrepreneur to keep the doors open may result in the director reducing his/her ability to rely on the due diligence defense

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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