Introduction to Joint Liability
We have income streams that are usually fixed. However, the outflow commitments may or may not be fixed. In the case of critical situations, there are chances of emergency cashflows. In such scenarios, there are chances that one may end up taking high levels of debt. The debt cycle affects the majority of low-income groups. Then what’s the solution? The solution is a joint liability! Having cash crunches is a usual economic scenario, but carrying a heavy debt by a single person is not a rational money choice.
What is Joint Liability?
It refers to a loan or a liability for which two or more persons are liable. It allows the respective parties to share the responsibility of contributing a specific sum simultaneously towards a liability.
- A banker grants a loan to an individual if they satisfy with the individual’s financial standing. However, if the required loan amount does not align with the existing financial standing, we can use the co-applicant’s financial status to adjust the loan balance needed.
This is where the joint liability concept gains its importance. - It may be between two persons or amongst many individuals. Each individual is jointly liable to honor the interest payment and repayment of the principal portion. It may initiate through an application by co-borrowers.
- Partnership firms generally experience joint liabilities. For example, if one partner of the firm applies for a loan on behalf of the firm, the remaining partners are automatically liable. The clauses of the partnership deed usually specify the automatic binding on other partners even if other partners do not know the act of the authorized partner. This is because the firm has already agreed by authoring one partner to sign any contract on behalf of the same.
- The action by one partner affecting all other partners is jointly and severally liable. It implies that all partners are liable to compensate in case of default. Further, in case of default, the creditor can pursue action only against one party separately.
Examples of Joint Liability
Below are the different examples :
Example #1
A classic example of joint liability is when spouses take home loans jointly after marriage. It is the most feasible option if both spouses are working professionals and have a consistent income stream. However, in case of an unfortunate event, the other spouse is liable for repayment of the balance amount of the liability.
Example #2
Another example is where a partnership firm takes liability. One of the firm’s partners is authorized to sign on behalf of the firm. In case of default, the creditor may sue a partner with the deepest pockets. The deepest pocket means one who has an ample amount of funds. This helps the creditors to secure their principal amount.
Example #3
Hospitals assume responsibility for any incorrect treatment. The attending doctor and relevant nurse are charged with joint liability in case of malpractice during the patient’s medical treatment. In case either of the defendants dies, the other person is liable to make good the loss. Similarly, if the attending doctor pays off the entire liability in one go, the nurse is not held liable. This protects the plaintiff from getting the double benefit against the actual amount.
Example #4
As explained earlier, joint liability can be specified as jointly and severally liable for partnership firms. 4 out of 5 partners can die. In such special cases, the creditor has the right to sue the single partner against the joint liability taken up by the firm.
Advantages of Joint Liability
- Joint liability divides the risk between the parties to the contract such that all are held responsible for paying the amount.
- It reduces the risk of the creditor against the principal amount lent to the borrowers or the firm.
- In case of default, the creditor has the right to use the other party for a rightful claim of dues.
- Since all partners know the joint liability, the stress level decreases, and work efficiency increases.
- If the joint liability contract parties settle the installments as per the due date, the liability does not pile up. In contrast, a single individual has taken up the liability, and his liability gets piled up in case installments are missed.
- As against the several liabilities, joint liability trials are simple. Where the claims are proven right, complete compensation provides to the creditors.
- It may happen that the default is due to a single partner. If there were several liability cases, the partner would have paid only his part of the default, and other partners would have to suffer unjustifiably. In the case of joint liability, the defaulting partner can charge to pay the full amount.
- If one partner pays the liability, the other is relieved from his responsibility. This saves the other partner in case he is suffering from financial stress.
Disadvantages of Joint Liability
- This argues that one partner should not be held responsible if one specific partner is responsible for the loss.
- As explained earlier, the creditor usually targets a partner with high net worth. Also, the creditor has full rights to do so. If the less wealthy know this, they may run the business with a more risk appetite than normal.
- The scheme somewhere discourages start-ups from going for risky ventures using joint liability.
Key Takeaways for Joint Liability
- Joint liability refers to a loan or a liability for which two or more persons are liable. It allows the respective parties to share the responsibility of contributing a specific sum simultaneously towards a liability.
- It may be between two persons or amongst many individuals. Each individual is jointly liable to honor the interest payment and repayment of the principal portion. It may initiate through an application by co-borrowers.
- Example A spouse’s home loan, joint liability by a partnership firm, or joint liability assumed by an attending doctor and the nurse.
- It is A special case where the partners are jointly and severally liable.
Conclusion
Joint liabilities are good when start-up ventures start with bank loans. It helps them to take up bulky funds using the credit profile of all partners. It allows them to fund their business with sufficient room for research and expenditure.
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