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 by which a people's court entrusts litigation assets to a qualified auction institution and an online platform for asset disposal, so as to ensure the ultimate realization of the lawful rights and interests of the parties involved. Compared with traditional judicial auctions, online judicial auctions offer advantages such as a broader audience, faster liquidation, lower commissions, and stronger oversight. In 2014, the average rate of online judicial auctions in Zhejiang courts reached 93.97%, and online judicial auctions have become the mainstream model for court judicial auctions.
I. Auction Bidding Methods and Their Pros and Cons
Article 3 of China's Auction Law stipulates: “Auction refers to a form of sale in which specific goods or property rights are transferred to the highest bidder through public competitive bidding.” “Highest bidder wins” is the fundamental principle of auction, but the Auction Law does not specify how the highest bidder is determined. According to common international auction industry practices, there are various methods for determining the highest bidder, including the English style, Dutch style, sealed-bid style, standard increment style, and Vickrey style, among which the English style and Dutch style are the most common.
English-style bidding, also known as "ascending-price auction," originated in England. This bidding method requires that a starting price and a minimum bid increment be determined before the auction begins. Once the auction starts, bids are raised from the starting price by the minimum increment, and the bidder in the final round whose bid exceeds the reserve price is the highest bidder. The advantage of English-style bidding lies in the fact that the competitive dynamics during the auction are evident, with participants raising their paddles in turn to drive up the price, creating a lively atmosphere. For this reason, English-style bidding is the most widely used bidding method, and it is generally adopted in current judicial online auctions in China.
Dutch auction, also known as a “reducing auction,” originated in the Netherlands and was initially used to auction large quantities of goods that do not keep well, such as tulips. Bidding starts at a pre-set high price, and as time passes, the price of the lot gradually decreases. During this downward price movement, once a bid is made, the auction is concluded. In a Dutch auction, there is only one opportunity to bid, and the first person to bid is the highest bidder. Compared with the English auction, which features the obvious outward action of alternating bids, the Dutch auction is more a contest of “psychology”——when the price of the lot falls close to a bidder’s psychological threshold, the bidder feels an urge to bid and, fearing that a slight delay will allow someone else to win the lot, dares not hold back. The advantage of the Dutch auction is that the psychological contest among bidders brings the transaction price of the lot closer to its actual value, and the transaction process is relatively quick. Its disadvantage is that the bidding contest is mainly psychological, so the auction scene often appears quiet and lacks a lively atmosphere. For this reason, the Dutch auction is not welcomed by some auction organizers, and its scope of application is also smaller than that of the English auction.
II. Shortcomings of English-Style Bidding in Judicial Online Auctions
China's judicial online auction adopts the English-style bidding, with the starting price and the reserve price determined first. In practice, the starting price is generally set slightly lower than the reserve price, though many courts directly treat the starting price as the reserve price. Regarding the determination of the reserve price, Paragraph 3, Article 8 of the Provisions of the Supreme People's Court on Auction and Sale of Property in Civil Enforcement by People's Courts (hereinafter referred to as the "Provisions") stipulates: “The reserve price determined by the people's court shall, at the first auction, be no less than eighty percent of the appraised value or the market price; if the auction fails, the reserve price may be reduced as appropriate at the subsequent auction, but the amount of each reduction shall not exceed twenty percent of the previous reserve price.”
In enforcement practice, the provision that "the amount of each reduction shall not exceed twenty percent of the previous reserve price" is somewhat broad, and courts tend to choose reduction tiers of 5%, 10%, 15%, or 20% when determining the reserve price. However, there is still no objective or scientific basis for why a particular tier is chosen, and the price reduction process is mixed with contingent factors and the personal views of the judge handling the case. In certain cases, the reduction margin of the reserve price lacks reasonableness, fails to effectively protect the rights and interests of both the applicant for enforcement and the person subject to enforcement, and also has a negative impact on the efficiency and effectiveness of the court's case handling.
First, a small price reduction leads to a failed auction, harming the rights and interests of the applicant for enforcement. Where the subject matter of enforcement, being real property (hereinafter referred to as the "auction item"), fails to be sold at auction three times and also fails to be disposed of by sale, according to Article 28 of the Provisions, the applicant for enforcement has the right to accept the property in satisfaction of debt at the reserve price at the time of the failed auction. If the applicant for enforcement does not agree to accept the property in satisfaction of debt, the court "shall lift the seizure and freezing, and return the property to the person subject to enforcement." Where the price reduction is too small, even after three rounds of failed auctions, the reserve price after the failed auction remains higher than the applicant for enforcement's psychological expectation of the auction item's price. The applicant for enforcement is unwilling to accept the auction item in satisfaction of debt, and the auction item is ultimately returned to the person subject to enforcement. This situation harms the rights and interests of the applicant for enforcement, causing the applicant to mistakenly believe that the court favors the person subject to enforcement.
Second, an excessive price reduction amounts to a sale at an unfairly low price, harming the rights and interests of the person subject to enforcement (including, under specific circumstances, the applicant for enforcement). After a lot fails to sell at the first or second auction, if the reserve price is sharply reduced by 20%, and a bidder happens to bid just above the reserve price and the sale is concluded, it will be difficult to maximize the price of the lot. For example, a bidder’s psychological price for a lot is 900,000 yuan. Because it does not reach the reserve price of 1 million yuan at the first auction, the lot fails to sell. At the second auction, the reserve price is directly reduced by 20% to 800,000 yuan. The bidder bids 800,000 yuan, and due to insufficient market competition, the sale is concluded when no one else competes. This situation harms the rights and interests of the person subject to enforcement and easily gives rise to the person’s dissatisfaction with the court for “selling off” its assets at an unfairly low price. If the price of the lot “shrinks” too greatly and the auction proceeds are still insufficient to satisfy all of the creditor’s claims, it will also harm the creditor’s rights and interests. For a creditor whose security interest is created over the lot, the portion not repaid in this round of auction will lose the right to priority repayment.
Analyzing the high rate of failed auctions on Taobao's judicial auction platform, the trend of insufficient price reductions is more severe among the two biases mentioned above. For instance, in 2014, the judicial online auction success rate of the Zhoushan Intermediate People's Court in Zhejiang Province was 89.47%. However, most successful bids occurred during the second, third, or even auction sale stages, with the first auction success rate being only 10.52%. As auction items went through multiple rounds of failed auctions, the case execution cycle was prolonged, and execution efficiency declined significantly.
Three, Basic Concept of Introducing Dutch Auction
The above-mentioned problems stem from the setting of the reserve price at either an excessively high or excessively low level, and abolishing the fixed reserve price may serve as a viable solution. If the reserve price is defined as a "fluctuating range" that adjusts gradually from the maximum value to the minimum value, it would effectively accommodate the differing needs of the judgment creditor and the judgment debtor regarding the extent of the reserve price reduction, and the Dutch auction satisfies the aforementioned requirement of 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, suppose the appraised value of an auction item is 1 million yuan. If all three auctions fail to sell, the minimum transaction price will drop to 1,000,000 × 80% × 80% = 640,000 yuan. Therefore, when the Dutch auction method is adopted, the reserve price can be reduced from 1 million yuan to 640,000 yuan. At present, the bidding period for a single auction item in judicial online auctions is generally 24 hours. Accordingly, the Dutch auction can be divided into 24 price reduction periods. After the auction begins, if the price reduction per hour is F, then F = [(100 - 64) / 24] ten thousand yuan, and the benchmark price in the Nth hour is [100 - F × (N - 1)] ten thousand yuan. If within the Nth hour there is one and only one bidder, the auction item shall be won by that bidder; if within the Nth hour there are two or more bidders, the Dutch auction shall terminate, and among those two or more “shortlisted bidders,” an English ascending auction shall commence at the benchmark price for the Nth hour. The minimum bid increment may be specified in advance in the auction announcement, and bidding may proceed in successive rounds, with the highest bidder winning. If none of the shortlisted bidders raises the bid, the auction item shall be won by the first among the shortlisted bidders to have bid in the Dutch auction.
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, the demands of both parties are accommodated. Theoretically, the auction price may cycle from high to low. Starting at the highest appraisal price fulfills the judgment debtor’s demand for maximizing the realization value of the auction item. Ending at 64% of the lowest appraisal price maximally satisfies 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, regulating judicial conduct. The newly established auction process complies with the provisions on price reduction margins under Article 8 of the Provisions, and effectively regulates the statutory 20% price reduction authority, eliminating contingency and human factors in the price reduction process and combating the practice in judicial online auctions of “conducting power rent-seeking in the name of discretionary power.” This helps prevent backroom dealings and ensure judicial integrity.
Fourth, maximizing the price of the lot. The example mentioned earlier—"a bidder's psychological price for a lot is 900,000 yuan, yet the transaction is concluded at 800,000 yuan"—is unlikely to occur in a Dutch auction: when the price of the lot drops from 1,000,000 yuan to 900,000 yuan, the bidder accepts the price because it has reached his psychological expectation, and the transaction is concluded. Retaining the English auction on the basis of the Dutch auction constitutes a "double safeguard measure," designed to foster deeper competition among the shortlisted bidders from the Dutch auction, allowing the lot price to rebound after hitting its floor during the price reduction, and guarding against undervaluation of the lot when market competition is insufficient.
(Zhejiang Zhoushan Intermediate People's Court)
