Joint Liability

Joint Liability Definition

Joint Liability in simple terms defined as a shared liability, if the business defaults, then all the partners have the whole responsibility to pay off the due. In Joint liabilities, the risk associated in case of default will be shared between partners.

Examples of Joint Liability

The following are examples of joint liabilities.

Example #1

Mr. A and Mr. B are planning to set up a company with money borrowed from the bank. They applied a loan of $2M under the joint liability scheme. So what will happen if they default?

Solution:

Joint Liability allows parties to jointly apply for a loan as co-borrowers. This rule is mentioned in General Partnership, where any partner if enters into a contract with or without the knowledge of the other partner automatically binds all partners to the contract.

So both Mr. A and Mr. B will be held guilty if they fail to make the payment to the bank. So one must be aware that in case of joint liability the liability is joint, so it is the responsibility for both the parties that the obligation is met or else both the parties will be convicted guilty and they can’t shift the blame on each other. If one of the partners dies then the other partner will have to pay off the loan.

Example #2

Company ABC is operated by two partners. If the company runs under a joint liability scheme, then what action can creditors take in case of payment failure?

Solution:

Creditors can sue any partner or both if he wants to. Joint liability binds both the partners to clear debts. If between two partners one partner is weak financially, then creditors may target the partner with a strong financial base and can sue him to extract the money. Once the creditor gets back his money say from partner A, then he can’t recover further amounts from the rest of the partners.

Joint Liability

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Difference Between Joint and Several Liability

  • In several liability schemes, all the parties are responsible for their respective obligations. So if one partner defaults then the rest of the partners will not have to bear its obligation.
  • In joint liability, the default risk lies in all the partners in full. So if there is a default then any of the partners will have to settle the 100% liability.
  • In the case of several liabilities, say there are 5 partners and they have the liability of $5 Million. So each partner has a liability of $1 Million.
  • In case of default, no one can ask one single partner to pay the entire liability of $5 Million. In several liabilities, each partner is only liable for his particular share, unlike joint liability where the entire $5 Million liability lies on all the partners.

Example #1

5 Partners jointly took a loan from the bank for business under several liability schemes. What will happen if one party defaults?

Solution:

Under several liability schemes the bank will have to sue the particular partner who has defaulted. The rest of the partners can’t be held responsible for the extraction of full dues. So several liability scheme protects other partners.

Example #2

Syndicate loanSyndicate LoanA loan syndication is an arrangement in which multiple lenders pool their resources to lend to a single entity. It is done to meet a borrower's large requirements, and the lenders are typically banks and other financial institutions.read more agreements are common types of several liabilities. In Syndicate Loan, several banks come together to give loan to a borrower. If one bank in the syndicate fails to provide its agreed part of the loan, then the borrower can sue only that particular bank, not all the banks in the syndicate.

Advantages

  • Joint liability is termed fair because if two or more person has caused financial loss, then it is fair that both of them should take responsibility for the complete loss. If one partner has made a loss in the supervision of the other partner then it is the other partner’s mistake and he should also be fully responsible to pay back losses.
  • As it will always be in the minds of partners that in default all partners will be held responsible, so they start working more efficiently and they try to prevent the rise of liability as a whole.
  • Joint liability trials are simpler in court, they are not complex like several liabilities. Full compensation is provided to creditors when charges are proven right.
  • There could be one single partner who should be responsible for full loss, but in several liabilities, only his portion will be charged from him, but in joint liability, he may have to pay the whole damage which is right.

Disadvantages

  • Many argue that it is not fair to hold a particular partner responsible for the whole loss, while it may be that it was not his fault for the loss.
  • It has been found that the partner with wealth is always targeted in Joint Liability schemes. This is not fair and it makes the other partner with less wealth to run the business more riskily as he knows that during a lawsuit the wealthy partner will be sued
  • This scheme is preventing new talents from entering a partnership business as they are worried about paying the full loss if their partners make mistakes.

Conclusion

Joint Liability is a popular method for setting up partnership companies. It helps to share the risk and reward. It helps creditors to extract their dues in full and also acts as a safe tool for them.

This has been a guide to what is Joint Liability and its definition. Here we discuss the examples of Joint Liability company along with its differences from Several Liability. You can learn more from the following articles –