LETTER TO LEGAL COUNSEL

Dear Attorney,

Good day! I hope this message finds you well. I am writing on behalf of the newly elected Board of Directors of our condominium corporation. We recently assumed office and have discovered that there are outstanding debts and contractual obligations incurred by the previous Board. We would like to understand whether we, as the newly elected Board, are legally bound to settle these unpaid balances, even though the contracts and transactions giving rise to these obligations were executed under the previous management.

We respectfully request your guidance on this matter. In particular, we would appreciate your advice on the relevant provisions of Philippine law, including any sections of the Condominium Act, the Revised Corporation Code, the Civil Code, and related jurisprudence that clarify the liability of newly elected condominium boards in situations like ours. We aim to handle these financial obligations with integrity and in accordance with the law, while also safeguarding the interests of the homeowners.

Thank you very much for your assistance in shedding light on these concerns. We look forward to your timely counsel regarding the best course of action.

Sincerely,

A Concerned Unit Owner and New Board Director

LEGAL ARTICLE ON THE OBLIGATIONS OF A NEWLY ELECTED CONDOMINIUM BOARD REGARDING PREVIOUS DEBTS

Introduction and Overview
The election of a new Board of Directors for a condominium corporation in the Philippines marks a fresh start in governance. However, with new leadership comes the responsibility of addressing any pending financial obligations that the condominium corporation had prior to the new Board’s tenure. This article aims to provide an exhaustive overview of the legal principles that govern the liability of a newly elected condominium board to settle outstanding debts incurred by the previous board. Drawing from the Condominium Act (Republic Act No. 4726), the Revised Corporation Code of the Philippines (Republic Act No. 11232), the Civil Code of the Philippines (Republic Act No. 386), and pertinent jurisprudence, we will clarify why obligations incurred under the previous Board generally remain binding on the condominium corporation as a juridical entity. We will also discuss the practical steps a new Board can take to verify and appropriately settle, contest, or negotiate these obligations.
Nature of a Condominium Corporation
a. Juridical Personality
Under Philippine law, a condominium corporation acquires a distinct juridical personality separate from that of its members, unit owners, or directors. This corporate personality, once formed, persists regardless of changes in the composition of its Board of Directors or its officers. A foundational principle of corporate law is that the entity itself, not its individual directors, is responsible for the corporation’s obligations unless there are strong legal bases to pierce the veil of corporate fiction. Hence, when a previous Board contracts with vendors or suppliers on behalf of the condominium corporation, the corporation remains the contracting party.

b. Applicability of the Revised Corporation Code
The Revised Corporation Code of the Philippines (R.A. 11232) governs essential aspects of corporate governance, including the powers and responsibilities of the Board of Directors. The condominium corporation’s obligation to honor the debts incurred under a valid corporate act generally continues unabated despite a change in the Board’s membership. This principle ensures business stability and protects third-party rights arising from agreements executed in good faith.
Condominium Act (Republic Act No. 4726)
a. Provisions Governing Condominium Governance
The Condominium Act does not explicitly detail every aspect of a condominium corporation’s liabilities. Instead, it provides the basic legal framework for the creation and regulation of condominiums. It allows the condominium corporation to adopt bylaws that set forth the rights, obligations, and limitations of the Board of Directors, among other key governance details.

b. Impact on Obligations
While the Condominium Act focuses on rights and obligations among unit owners and the common areas, it implicitly recognizes that the condominium corporation operates similarly to any other corporation in terms of contractual relationships, liabilities, and obligations. Therefore, when a condominium corporation under the stewardship of a previous Board enters into contracts (e.g., security services, cleaning services, landscaping, property management, and the like), those contracts remain enforceable against the corporation itself, not merely the individuals who executed the agreements in a representative capacity.
Civil Code of the Philippines (Republic Act No. 386) Provisions
a. Obligations and Contracts
The Civil Code lays down fundamental principles on obligations and contracts, codifying that a valid contract binds both parties (in this case, the condominium corporation and its vendor or supplier) to comply with the agreed-upon stipulations. Articles 1159 and 1315 of the Civil Code underscore that obligations arising from contracts have the force of law between the contracting parties, thus making the condominium corporation liable for debts incurred in accordance with valid and enforceable contracts.

b. Assignment of Debt and Transfer of Rights
The Civil Code also provides mechanisms for assignment of rights and obligations. A contract’s obligations remain with the corporation even if the individuals representing it have changed. The new Board essentially steps into the shoes of the previous Board regarding corporate affairs. Absent any express novation, fraudulent stipulations, or specific contractual terms releasing the corporation from liability, the debt obligation will persist.
Corporate Liability Versus Individual Liability
a. Distinction Between Corporate Acts and Personal Acts
The law draws a line between acts done in a personal capacity and acts executed in an official representative capacity. A Board member who signs a contract on behalf of the condominium corporation typically binds the corporation, provided that the Board member was acting within his or her authority. Unless there is a clear indication of fraud, bad faith, or ultra vires acts (acts outside the scope of corporate authority), the default rule is that the obligation is corporate in nature.

b. Personal Liabilities of Directors
Directors can incur personal liability only under specific circumstances, such as fraud, gross negligence, or a willful violation of the law. Under Section 30 of the Revised Corporation Code, a director who willfully and knowingly votes for or assents to patently unlawful acts of the corporation, or who is guilty of gross negligence or bad faith, can be held personally liable. Nonetheless, routine transactions that were executed lawfully and in good faith will not give rise to personal liability but remain as obligations of the condominium corporation as a separate entity.
Effect of a Change in Board Composition
a. Continuity of Corporate Existence
The legal doctrine of corporate continuity affirms that the condominium corporation does not cease to exist simply because of a change in its board membership. The corporate entity endures, and with it endures all rights, obligations, and liabilities it has assumed. This ensures that entities dealing with the corporation can rely on the principle that obligations, once validly incurred, remain intact throughout changes in leadership.

b. Non-Disruption of Contractual Obligations
If the condominium corporation could unilaterally disavow obligations every time the Board underwent reorganization, it would pose a risk to commercial stability. Suppliers and service providers could lose confidence in contracts with condominium corporations, undermining the property’s management. Philippine courts and statutory law therefore uphold that a board transition does not extinguish existing contractual obligations.
Validating the Authority of the Previous Board
a. Checking Corporate Records
In practice, the newly elected Board should verify that the debts and other obligations incurred by the previous Board were validly authorized. This involves reviewing board resolutions, contracts, corporate books, minutes of meetings, and related documentation to ensure there was no fraud or breach of internal approval processes. If it emerges that a prior Board acted without the requisite authority or contravened the condominium corporation’s bylaws, there could be grounds to contest or renegotiate some obligations.

b. Ultra Vires Acts
An ultra vires act refers to a corporate act that goes beyond the scope of the corporation’s charter or the powers conferred by law. If a previous Board engaged in an ultra vires act, it may be deemed void or unenforceable against the corporation. Nonetheless, third parties may still claim the benefit of good faith if they had no reason to suspect an overreach of authority. The facts must be scrutinized to establish whether the counterparty relied on representations that were lawful on their face or had knowledge of the Board’s limited authority.
Handling Potential Irregularities or Fraud
a. Investigating Fraudulent Acts
The new Board should conduct a comprehensive audit of the condominium corporation’s finances and transactions, especially if suspicious irregularities are evident. Any signs of fraudulent contracts, double-billing, falsified invoices, or collusion with suppliers should be thoroughly investigated. If fraud or bad faith is proven, the new Board can seek legal remedies, potentially shifting liability away from the corporation if it can be shown that the vendor or supplier was complicit in the fraudulent scheme.

b. Legal Remedies and Criminal Liability
In cases of clear fraud or malversation of funds, the new Board should explore legal avenues under the Revised Penal Code, and possibly file civil or criminal actions against those responsible. Nevertheless, if the third-party supplier or vendor acted in good faith and the contracts were executed within the scope of the prior Board’s authority, the condominium corporation generally remains liable to fulfill those obligations.
Steps for the Newly Elected Board
a. Due Diligence and Transparency
Upon taking office, the new Board should promptly conduct a rigorous financial review. This includes reviewing all vendor contracts, bank statements, financial reports, and any available audit reports. Transparency with homeowners is vital to build trust in the new administration’s management.

b. Negotiation and Settlement
If the condominium corporation has legitimate debts, yet faces financial constraints, the new Board can negotiate with creditors or suppliers for a restructured payment schedule or for partial condonation of interest or penalties. This approach upholds the corporation’s contractual obligations while safeguarding the financial stability of the association.

c. Ratification of Contracts
If certain obligations were not formally ratified by the previous Board, the new Board may bring them before the unit owners and/or the board for ratification, reaffirming or clarifying the corporate entity’s binding commitments. If the board or unit owners collectively decide not to ratify, the specific reasons must be legally sound (e.g., an ultra vires act or proven fraud).

d. Amending Bylaws and Strengthening Internal Controls
To prevent similar issues in the future, the new Board may propose amendments to the condominium bylaws or adopt more stringent internal policies. These can include better procurement procedures, stricter requirements for contract approval, and the mandatory use of external auditors for periodic financial reviews. Establishing clear signatory authority levels and transparent processes can help mitigate the risk of dubious transactions.
Jurisprudential Support
Philippine courts have consistently upheld the principle that a corporation remains bound by the valid contracts it enters into, even if there is a complete change in the composition of its Board of Directors. This is reinforced by decisions wherein courts ruled that newly installed directors cannot repudiate obligations that were lawfully incurred by their predecessors. Unless there is a well-substantiated claim of fraud, illegality, or ultra vires acts, the continuity of obligations remains a cornerstone of corporate jurisprudence.
Potential Liability Issues for the New Board
a. Obligations to Act Diligently
As fiduciaries, the new Board members owe the condominium corporation the duty of diligence, loyalty, and obedience. They must act in the best interest of the corporation and its unit owners. If they fail to settle or properly address legitimate outstanding obligations, aggrieved parties could hold them accountable for breaching their fiduciary duty, especially if the negligence or refusal to pay causes further damage to the corporation.

b. Implications of Neglecting Legitimate Debts
The condominium corporation may face lawsuits, damage claims, or property liens if it does not honor valid debts. Creditors may take legal action to enforce judgments, potentially seizing corporate assets or initiating garnishment proceedings against association funds. Such liabilities could indirectly harm unit owners by increasing association dues or weakening the association’s financial standing.

Role of Homeowners in Determining Liability
a. Collective Decision-Making
Some condominium corporations have provisions that allow unit owners to vote on major financial decisions, including settling long-term debts, approving special assessments, or allocating reserves for unforeseen liabilities. In such cases, the new Board should be prepared to present facts transparently to the unit owners, highlighting the benefits of timely debt settlement and the risks of non-compliance.

b. Special Assessments
If the previous Board incurred obligations surpassing the annual budget or reserves, the new Board might need to explore special assessments to cover these debts. Although potentially unpopular, special assessments, if approved in accordance with the corporate bylaws, can provide a path to immediately address pressing financial liabilities while preserving the condominium’s creditworthiness.

Practical Tips and Best Practices

Maintain Accurate Records: Ensuring that corporate records are complete and up to date allows a smooth transition between boards. This includes detailed ledgers, invoices, minutes of meetings, and contracts.
Conduct Regular Audits: Hiring an external auditor, at least annually, can detect irregularities early and help prevent major financial mismanagement.
Establish a Transition Process: A structured handover between the outgoing and incoming boards can clarify pending matters, outstanding obligations, and ongoing contractual relationships.
Seek Professional Advice: When in doubt, consult a qualified lawyer or accountant who specializes in condominium law and corporate governance to ensure compliance and proper handling of potential disputes.
Open Communication with Homeowners: Regularly inform the homeowners of financial status updates, especially if there are outstanding debts that need to be addressed. Transparency fosters trust and cooperation from unit owners.

Defenses Against Unreasonable or Inflated Claims
a. Verification of Scope of Work and Deliverables
If the previous board’s contracts involve services or goods that were not delivered, partially completed, or were substandard, the new Board may have grounds to dispute the charges or seek a reduction in the amount owed. Engaging third-party professionals to verify the completion and quality of contracted services can provide objective evidence in any dispute.

b. Settlement Agreements
If there is a genuine dispute about the legitimacy or the amount of the debt, the condominium corporation can consider entering into a settlement agreement with the vendor or service provider. Settlement allows both parties to avoid protracted litigation. Any such agreement should be carefully documented and approved by the current board after due deliberation.

Conclusion
The core principle underlying a condominium corporation’s obligations is that the entity itself, as a separate juridical person, remains bound by its contractual commitments, irrespective of changes in board membership. Newly elected directors generally inherit any outstanding liabilities incurred by their predecessors unless there is compelling evidence of fraud, illegality, or an ultra vires act. The Revised Corporation Code, the Civil Code, and applicable jurisprudence consistently uphold the sanctity of contracts and provide limited exceptions that might allow a new Board to repudiate a prior obligation.

Nevertheless, the new Board must exercise due diligence to review all contractual documents to ensure they were authorized and properly executed. If any contract is found to be void or unenforceable due to fraud or lack of authority, the new Board may have legal grounds to contest it. Ultimately, honoring legitimate debts strengthens the condominium corporation’s financial position and credibility.

From a practical standpoint, while the new Board may feel hesitant to shoulder the burden of debts incurred by the previous administration, failing to meet legitimate obligations can lead to legal liabilities and reputational risks. Therefore, the recommended course of action is for the Board to:

Conduct a thorough financial audit and review all relevant contracts.
Verify the validity and scope of each obligation.
Rectify or negotiate terms if needed, especially if there is evidence of unauthorized or fraudulent transactions.
Fulfill rightful obligations to maintain the corporation’s creditworthiness.
Implement systematic internal controls to avoid recurrence of financial mismanagement.

In sum, while stepping into the shoes of a previous board can be daunting—especially if financial irregularities or large debts are discovered—the legal framework in the Philippines firmly establishes that a condominium corporation remains liable for contracts lawfully entered into by its duly authorized representatives. A new Board must handle these obligations prudently, balancing its fiduciary duty to protect the interests of homeowners with the legal necessity of honoring the corporate entity’s legitimate commitments.

Disclaimer: This legal article is for informational purposes only and does not constitute, nor is it intended to serve as, a substitute for individualized legal counsel. Laws and regulations may change, and the specific facts of each case can affect how the law applies. Always seek the advice of a qualified legal professional for any concerns or questions regarding specific legal matters.