Joint Liability Definition Is It Different From Several Liability

Joint Liability Definition

Examples of Joint Liability

The following are examples of joint liabilities.

Example #1

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

Solution:

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

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

Example #2

Two partners operate the company ABC. If the company runs under a joint liability scheme, what action can creditors take in case of payment failure?

Creditors can sue any partner or both if he wants to. Joint liability binds both partners to clear debts. If one partner is weak financially between two partners, 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 from partner A, he can’t recover additional amounts from the rest of the partners.

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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.The default riskDefault RiskDefault risk is a form of risk that measures the likelihood of not fulfilling obligations, such as principal or interest repayment, and is determined mathematically based on prior commitments, financial conditions, market conditions, liquidity position, and current obligations, among other factors.read more lies in all the partners in full joint liability. 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 five 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 partner to pay the entire liability of $5 Million. Each partner is only liable for their particular share in several liabilities, unlike joint liability, where the entire $5 Million liability lies on all the partners.

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

Under several liability schemes, the bank will have to sue the particular partner defaulted. The rest of the partners can’t be held responsible for extracting full dues. So, several liability schemes protect other partners.

Syndicate loanSyndicate LoanWhere a group of lenders usually collaborates through an intermediary being a lead financial institution, or syndicate agent, which organizes and administers the transaction, including repayments, fees, etc. to provide financial requirements to a single larger borrower (usually out of the capacity of a single lender) where the division of risk and returns takes place between each other takes place is known as loan syndication.read more agreements are common types of several liabilities. In Syndicate Loan, several banks give loans to a borrower. If one bank in the syndicate fails to provide its agreed part of the loan, the borrower can sue only that particular bank, not all the banks.

Advantages

Joint liability is termed fair because if two or more people have 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 for paying 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 try to prevent the rise of liability as a whole.Joint liability trials are simpler in court and are not complex like several liabilities. Full compensation is provided to creditors when charges are proven right.One partner 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 run the business more riskily as he knows that the wealthy partner will be sued during a lawsuit.This scheme prevents 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 creditors extract their dues in full and acts as a safe tool for them. It helps to share the risk and reward.