Judicial online auctions introducing "Dutch-style" bidding is more reasonable
Currently, courts in many parts of China have already carried out judicial online auctions. Compared with traditional auction methods, judicial online auctions have certain advantages, but this auction method is still a new thing, still being explored, and its theoretical research has not been conducted in depth. The author's reflection on the mixed bidding method of judicial online auctions provides a new perspective for the study of this issue, helping us deepen our understanding of judicial online auctions.
Online judicial auction refers to the process where people's courts entrust litigation assets to professionally qualified auction institutions and online platforms for asset sales, ultimately ensuring the realization of the parties' legitimate rights and interests. Compared with traditional judicial auctions, judicial online auctions have advantages such as wide audience, fast liquidation, lower commissions, and stronger supervision. In 2014, the average judicial online auction rate in Zhejiang courts reached 93.97%, and judicial online auctions have become the mainstream mode of court judicial auctions.
I. Auction Bidding Methods and Their Pros and Cons
Article 3 of China's Auction Law stipulates: "Auction refers to a method of sale where specific items or property rights are transferred to the highest bidder through public bidding." "The highest bidder wins" is the basic principle of auctions, but how the highest bidder is determined is not specified in the Auction Law. According to common practices in the international auction industry, methods for determining the highest bidder include the English style, Dutch style, sealed bid style, standard incremental style, Vickrey style, among others, with the English and Dutch styles being the most common.
The English-style bidding, also known as "ascending price auction," originates from England. It requires setting a starting price and a minimum increment before the auction. During the auction, bids increase by the minimum increment based on the starting price, and the last bidder whose bid exceeds the reserve price becomes the highest bidder. The advantage of English-style bidding lies in the clear competitive dynamics during the auction, with successive raises creating a lively atmosphere. For this reason, English-style bidding is the most commonly used method, and it is generally adopted in China's current judicial online auctions.
The Dutch-style bidding, also known as "descending price auction," originates from the Netherlands and was initially used for auctioning large quantities of perishable goods like tulips. The bidding starts from a preset high price, and as time passes, the price of the item gradually decreases. Once someone bids during the price decline, the auction concludes. Dutch-style bidding involves only one bid, and the first bidder becomes the highest bidder. Compared to the obvious alternating gestures of English-style bidding, Dutch-style bidding is more of a "psychological" game—when the price drops close to a bidder's psychological threshold, they feel an urge to bid and fear that delaying might let others win. The advantage of Dutch-style bidding is that the psychological game among bidders brings the transaction price closer to the actual value, and the process is quick. Its disadvantage is that the bidding game is mainly psychological, often making the auction scene seem dull and lacking excitement. Therefore, Dutch-style bidding is less favored by some auction organizers and has a narrower application than English-style bidding.
II. Shortcomings of English-Style Bidding in Judicial Online Auctions
China's judicial online auctions adopt English-style bidding, first determining the starting price and reserve price. In practice, the starting price is generally slightly lower than the reserve price, and many courts directly use the starting price as the reserve price. Regarding the determination of the reserve price, Article 8, Paragraph 3 of the "Supreme People's Court's Provisions on the Auction and Sale of Property in Civil Enforcement by People's Courts" (hereinafter referred to as the "Provisions") states: "The reserve price determined by the people's court shall not be less than 80% of the appraised value or market price in the first auction; if the auction fails, the reserve price may be appropriately reduced in subsequent auctions, but each reduction shall not exceed 20% of the previous reserve price."
In enforcement practice, the provision that "each reduction shall not exceed 20% of the previous reserve price" is somewhat broad, and courts tend to choose reduction levels such as 5%, 10%, 15%, or 20% to determine the reserve price. However, there is no objective or scientific basis for choosing these levels, and the reduction process involves random factors and the personal views of the presiding judge. In some cases, the reduction in the reserve price lacks reasonableness, failing to effectively protect the rights of both the applicant and the debtor, and negatively impacting the court's efficiency and effectiveness.
First, a small reduction leading to a failed auction harms the applicant's rights. If the subject property (hereinafter referred to as the item) in enforcement, being real estate, fails in three auctions and cannot be sold, according to Article 28 of the "Provisions," the applicant has the right to accept the item as debt repayment at the reserve price of the failed auction. If the applicant does not agree to accept the item as debt repayment, the court "shall lift the seizure and freeze, and return the property to the debtor." When the reduction is too small, even after three failed auctions, the reserve price remains higher than the applicant's psychological expectation for the item's price, leading the applicant to refuse to accept the item as debt repayment, and the item is ultimately returned to the debtor. This situation harms the applicant's rights, leading them to mistakenly believe that the court favors the debtor.
Second, excessive price reductions and bargain sales harm the interests of the judgment debtor (including the applying creditor in specific cases). If a lot fails to sell in the first or second auction, and the reserve price is significantly reduced by 20%, a bidder who just meets the reserve price may win the lot, failing to maximize the lot's price. For example, if a bidder's psychological price for a lot is 900,000 yuan, but it fails to sell at the first auction's reserve price of 1 million yuan, and the second auction's reserve price drops 20% to 800,000 yuan, the bidder offers 800,000 yuan. Due to insufficient market competition, if no one else competes, the lot sells at that price. This harms the judgment debtor's interests and may lead to dissatisfaction with the court "selling off" their assets. If the lot's price shrinks excessively and the auction proceeds cannot cover all of the creditor's claims, the creditor's interests are also harmed. For creditors with security interests in the lot, the portion not satisfied in this auction loses priority in repayment.
Analyzing the high failure rate on the Taobao judicial online auction platform, between the two tendencies, the issue of insufficient price reductions is more severe. For example, in 2014, the Zhoushan Intermediate People's Court in Zhejiang Province had a judicial online auction success rate of 89.47%. However, most lots were sold in the second, third, or even distress sales, with only a 10.52% success rate in the first auction. Lots going through multiple failed auctions prolong the case enforcement cycle, significantly reducing enforcement efficiency.
Three, Basic Concept of Introducing Dutch Auction
The above issues stem from excessively high or low reserve prices, and eliminating fixed reserve prices could be a solution. If the reserve price is defined as a "fluctuation range," gradually adjusting from the maximum to the minimum, it can effectively balance the different needs of the applying creditor and judgment debtor regarding the reserve price reduction. The Dutch auction meets this requirement for variability.
The author believes that to ensure fairness, justice, and reasonableness in the disposal of enforced property, judicial online auctions should introduce Dutch auctions, using a hybrid method combining Dutch and English auctions. Specifically, based on the Dutch auction, prices decrease. When two or more bidders bid at the same level, an English auction is initiated, with prices increasing, to determine the final buyer.
For example: If a lot's appraised value is 1 million yuan, and it fails to sell in three auctions, the minimum sale price would drop to 1,000,000 × 80% × 80% = 640,000 yuan. Thus, in a Dutch auction, the reserve price can decrease from 1 million to 640,000 yuan. Currently, the bidding cycle for a single lot in judicial online auctions is generally 24 hours. Accordingly, the Dutch auction can be divided into 24 price reduction periods. After the auction starts, the hourly price reduction is F, where F = [(1,000,000 - 640,000) / 24] yuan, and the base price at the Nth hour is [1,000,000 - F × (N-1)] yuan. If only one person bids in the Nth hour, that bidder wins the lot. If two or more bidders bid in the Nth hour, the Dutch auction ends, and an English ascending auction begins among those "shortlisted" bidders at the base price of the Nth hour. The minimum bid increment can be specified in advance in the auction announcement, with rounds of bidding, and the highest bidder wins. If no one among the shortlisted bidders increases the bid, the first bidder in the Dutch auction wins.
IV. Advantages of Introducing the Dutch Auction Method
The "Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reforms," adopted at the Third Plenary Session of the 18th Central Committee, calls for further standardizing judicial procedures for handling case-related property, improving the bidding system for judicial online auctions, and introducing the Dutch auction method as a vivid embodiment of implementing this requirement. The Dutch auction method offers the following advantages:
First, it balances the demands of both parties. Theoretically, the auction price may go through a full cycle from high to low. Starting at the highest appraised value, it satisfies the judgment debtor's demand for maximizing the realization price of the auctioned item. Ending at 64% of the lowest appraised value, it maximizes the judgment creditor's demand to avoid a failed auction.
Second, it improves the efficiency of enforcement work. The newly constructed auction process can integrate the first, second, and third auctions of a conventional auction into a single procedure, shortening the auction cycle, enhancing the efficiency of judicial online auctions, and thereby improving the efficiency of civil enforcement work.
Third, it standardizes judicial conduct. The newly constructed auction process complies with the provisions of Article 8 of the "Regulations" regarding the extent of price reductions, effectively regulates the statutory 20% reduction authority, eliminates randomness and human factors in the reduction process, combats behaviors in judicial online auctions that "exercise power rent-seeking under the guise of discretion," helps prevent behind-the-scenes manipulation, and ensures judicial integrity.
Fourth, it maximizes the price of the auctioned item. The earlier example of "a bidder's psychological price for an item being 900,000 yuan, yet it was sold for 800,000 yuan" is unlikely to occur in a Dutch auction—when the price drops from 1 million yuan to 900,000 yuan, the bidder would accept the price as it meets their psychological expectation. Retaining the English auction method alongside the Dutch auction serves as a "dual safeguard measure" to foster deep competition among Dutch auction participants, allowing the price to rebound after hitting the bottom, preventing the undervaluation of the auctioned item due to insufficient market competition.
(Zhejiang Zhoushan Intermediate People's Court)
