Liability
Liability
/ˌlaɪəˈbɪlɪti/ (n.)
The value of one’s legal obligation. In financial services — indeed, generally in the arithmetic reckoning of the common law, which reduces the world to a kind of eternal ledger of debits and credits, that duty is articulated as a sum of money payable. Now, I am making this up as I go along, readers — no change there — but financial services practitioners have a notoriously loose grip of the English language, so hang it, call it a financial poet’s licence to be exact, even if that might be exactly wrong. We monetary bards[1] like to wield vocabulary with the deftness of a sturgeon. So let’s.
In the narrowest sense, a “liability” is a term of accounting art: everything that an “asset” is not, only rendered in those monochromatic, monetary terms — accountants are colour-blind: they only understand the world in dollars and cents; they perceive only the decimal code underlying the multi-hued panorama that confronts the rest of us — but this is, in its way, a useful concept to hold onto when drafting a legal contract. It distinguishes a liability from an obligation: your obligation is to provide a carbolic smoke-ball of merchantable quality; your liability is to pay £100 to a purchaser should it not work.[2]
We are close to the netherworld of jurisprudence by which we ask what is money. But let’s save that for another day.
A company’s shares, by way of illustration, are not liabilities, but rather represent an ownership interest in the issuing company.
Payment of liabilities out of own funds
You may occasionally see a covenant from an repackaging espievie to its security trustee as follows:
Payment of Liabilities: The issuer must, at all times, pay its liabilities out of its own funds or procure payment of such liabilities by other persons out of moneys owing to it.
This seems to be as close to canonical as anything on Planet Repack, but it hardly stands up to close scrutiny. What does it even mean? Is it a simply covenant to its trustee perform its contractual obligations to others? On what planet would a security trustee be animated or proactive enough to take upon itself the job of enforcing some other fellows entitlement, if the fellow was not inclined to do so herself? And for what? Or is it meant to constrain how the issuer discharges its liabilities to others; to proscribe the manner in which it discharges its debts? In which case, how else could it meet its liabilities other than from funds it holds or which are owed to it, without committing aggravated robbery?
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