What should creditors who apply for enforcement do in the event of failure of a judicial auction?

A creditor applies for compulsory enforcement, if the court discovers that the debtor has real estate, movable property, or other property rights (such as equity), the court would auction such properties. However, if auction fails in a judicial auction, what could creditors do? Whether those properties could be used to offset the debt?

According to the relevant provisions of the ” Provisions of the Supreme People’s Court on Auctioning or Selling off Property by People’s Courts in Civil Execution (Amended in 2020)” (hereinafter referred to as the “Auction Provisions”), the process of a judicial auction is as follows:

The court will issue an auction announcement. Any party, including the creditor, could act as bidders. That is, the creditor could choose to acquire the debtor’s property by bidding. However, in practice, in most cases, the creditor would not participate in bidding.

If the auction fails, the creditor could apply to hand over the auctioned property to offset the debt, with the offset amount is equal to the reserve price of the auction. If the creditor does not present apply for using the reserve price of the auction for offsetting debt, a new auction shall be held within 60 days. If the second auction fails again, the creditor still could apply to hand over the auctioned property to offset the debt, with the offset amount is equal to the reserve price of the second auction. If the creditor does not present apply for using the reserve price of the auction for offsetting debt, regarding the movable properties, the court shall lift the sealing up or distrainment and shall return those property to the person subject to execution; and regarding the real estate and other property rights, a third auction shall be held for the immovable property or any other property right within 60 days. If the third auction fails, and the creditor refuse to accept such auctioned property to offset the debt, the court shall, within 7 days as of the close of the third auction, issue a public notice of selling off. Within 60 days from the day when the public notice is issued, if no one is willing to buy the aforesaid property at the reserve price of the third auction and if neither the execution applicant nor other executing creditors accept the property to offset debt, the court shall lift the sealing up or distrainment and shall return the property to the person subject to execution.

The above mentioned “reserve price” could be determined in accordance with Article 5 of the “Auction Provisions”, that is, the auctioned property has been appraised, the appraised price shall be the reserve price of the first auction; if no appraisal has been made, the reserve price shall be determined by the court with reference to the market price. In addition, if the first auction fails, the reserve price may be lowered appropriately in the next auction, provided that the amount of each reduction shall not exceed 20% of the previous reserve price.

In summary, if a judicial auction fails, the creditor could choose to offset the debt with the auctioned property with the reserve price, normally, the reserve price in the second and third auction (excluding the movable property) is more friendly to the creditor.

Article 26 of the “Regulations of Supreme People’s Court on Several Issues Concerning Online Judicial Auctions” stipulates that, “Where nobody makes an offer during the bidding period of an online judicial auction, this auction fails. Another auction shall be organized within 30 days after the auction fails, on the same online judicial auction platform…” In view of this provision, there is a viewpoint holds that, according to the principle which says special laws are superior to general laws, in the case of online auctions, if the first auction fails, a new auction shall be held within 30 days, and the creditor is not entitled to offset the debt with the auctioned property.

In view of relevant cases, the current opinion is that although the “Regulations of Supreme People’s Court on Several Issues Concerning Online Judicial Auctions” has not stipulated the offset provisions, the offset provisions as stipulated in the “Auction Provisions” could be applicated in online auctions. The recent relevant cases held by the Supreme People’s Court represent this opinion. For example, in the case (2023) Zui Gao Fa Zhi Jian No.32, the court points out that, “The creditor could apply to hand over the auctioned property to offset the debt, where the first auction fails, the second auction fails, and the sell-off fails in the online judicial auctions.”; and in the case (2023) Jing Zhi Fu No.288, the court pointed out that, “The creditor applies to hand over the auctioned property to offset the debt, where the first auction fails, is not illegal.”