Author: Aadhya Anand, Symbiosis Law School, Pune

This Research Article explores the intricate process of enforcement of decrees and court-auction sales across various jurisdictions, focusing on comparing these practices to the Indian Framework. While court auctions play a vital role in enforcing decrees and reinstating public trust in the judicial system, the effectiveness and efficacy of the process varies across countries. By analyzing the best practices across jurisdictions in EU, Eastern Europe, Latin America etc., this article aims to identify the best mechanism that promotes efficiency, fairness and transparency. In the Indian context, the article elaborates on the legal framework for court auctions provided by the Code of Civil Procedure, 1908 (CPC), while exploring the possible reformative actions and their feasibility. The findings suggest that while India has a well-established framework for court auctions, there is ample room for reformation and improvement. Drawing lessons from international practices, this article aims to contribute to the efforts towards increasing the efficacy of court-auction sales and enforcement of decrees. 

The subject of court auctions as an enforcement procedure has been explored by Scholars in the recent past. These studies mainly deal with the region-centric analysis of the shortcomings. Exploration towards this topic started with CEPEJ 2007 which emphasized the necessity of effective enforcement and the legislative changes adopted by the UK in furtherance of the same. The Council of Europe in 2003 also referred to strengthening court auction procedures for strengthening enforcement agencies. A more detailed study emerged with Idee, Iwata and Taguchi 2008 which explored the shortcomings in the court auction mechanism and the loss it caused to parties, with data from the Osaka District Court. 

The most significant contribution is the World Bank Study in 2012 which analyzed the court auction system in various jurisdictions, recognized the reformative efforts taken worldwide and suggested the changes that could be incorporated. However, none of the studies to date have explored the topic from an Indian perspective. 

The court auction process in India is as insufficient as it is in other jurisdictions and hence this research article aims to bridge the lacunae left by previous region-centric studies and suggest improvements that can be feasibly incorporated into the Indian scenario.

Background

In any modern country with a functioning judicial mechanism, enforcing civil judgements is almost as important, if not more, as having a free & fair civil justice system where disputes are heard and relief is delivered. This is primarily to ensure that public trust in courts is reinforced as the credibility of the same largely depends on speedy and successful enforcement of judgements. A major chunk of civil suits primarily revolves around monetary considerations and the recovery of the same. With the courts already being infamous for their lengthy procedural delays and inactions, having a track record of unsuccessful implementation of decrees will further push civilians to explore avenues to remedy the dispute themselves. This will increase the instances of violent and unlawful interactions, further aggravating the law-and-order situation in the country. The most fool-proof way to prevent such a situation is to strengthen the court’s enforcement mechanism, right from the grassroots level. Countries world over have become quite aware of this reality in the past decades. For example, the UK brought about significant reforms after it realized that about 50% of small claims court judgements were subsequently not enforced. This was followed by a revision in other European Enforcement Laws to increase the efficiency, transparency and productivity of the procedures.

Often associated with charities, investments, business transactions, stock market etc., auctions are also a phenomenon that occurs in civil courts. The Code of Civil Procedure,1908 (CPC) empowers the courts to order the sale of property, by way of auction, to satisfy a decree. This process is governed primarily by Order XXI of the CPC, which outlines the procedures for executing decrees involving the sale of immovable property. The court appoints an auctioneer for this purpose and is vested with the responsibility to ensure that the auction is conducted fairly & transparently, upholding the best interests of the decree-holder as well as the judgement-debtor. 

Satisfying a decree by auctioning off the judgment debtor’s property is the last but most essential step in the civil judgment enforcement process. Ideally, public auctions with substantial participation are organized, bids are invited and the highest bid is offered the property at a price that is closest to the market value, under prevailing market conditions. However, the reality is most countries the world over, including India, is quite different. There have been several recorded instances where the court-organized auctions fetch a price much lower than the market price. Several factors like limited participation of the public, lack of information, bribing of auctioneers and efforts at expediting the auctioning process plague the system of court-auction sales. Further, the length of the time of enforcement and auctioning process has a direct influence on the recovery rate.

Is the existing court-auction sales process optimal, or are there specific areas where improvements are needed? What changes could be implemented to ensure that court auctions achieve fair market value and transparency?

This research article aims at:

1. Analyzing the shortcomings in the court-ordered auction process, whilst acknowledging reformative efforts of different countries.

2. Suggesting methods to improve the current state of affairs of the Indian Court-auction sales mechanism.

Once the parties have presented their arguments before a civil judge and a judgment is arrived at, a decree is passed which needs to be executed. When such decrees involve the recovery of debt, transfer of money, property etc., the Court can sell the judgment debtor's property (with or without attaching the same) under Section 51(b) of CPC. When the same is to be done by auction, Order XXI Rule 66 lays down the necessary guidelines, 

Firstly, a notice should be issued to the decree-holder and judgment debtor regarding the court’s intention to proclaim the auction. Description of the property, any encumbrances on it, amount of sale, time and place of auction etc. must also be proclaimed.

Secondly, any order passed under this rule shall be signed and verified in the manner prescribed.

Thirdly, the court is empowered to summon any persons to produce documents relating to the property to be auctioned. Further, the court is not obligated to declare its estimate value of the subject of the auction.

A proclamation must be made as per Rule 54(2) and in the Official Gazette and newspapers, the cost of which shall be considered ‘Cost of Sale’. In case the property is divided into lots, separate proclamations are not necessarily subject to the opinion of courts. From the date of proclamation, the auction shall not take place before 15 days in the case of immovable property and 7 days in the case of moveable property. 

Once the auction concludes, the auctioneer must deposit the proceeds in the treasury within a prescribed period. If the recovered amount is unsatisfactory, the court may discretionarily order a re-auction. On grounds of fraud or material irregularity, the sale can also be challenged by the parties involved in the suit.

While the court is not obligated to give an estimate, it cannot rescue itself from applying its mind in case of auctions. The Kerala HC stated that the proclamation under Order XXI Rule 66 must reflect that the court has applied its mind while settling the issue leading to the auction. The case involved a writ petition by the judgement-debtor on the ground that the mandate under the aforementioned rule hasn’t been followed (Unni Madhavan Nair vs. Sreenaranyana Investment)

If the judgment debtor wishes to make any offer to prevent the auction, the same has to be done before proclamation. Any subsequent offer, even offering double the auctioned amount, can be disregarded by the court under Order XXI (Bahadur Chand vs. Madan Lal Etc.). 

While an estimate of the subject of the auction can be suggested by both parties, the court should apply its mind and arrive at an estimate in case of the absence of the same. The Judgement-debtor must be called for an appearance before the court and given an opportunity to do the same. (Desh Bandhu Gupta vs. N.L. Anand and Rajinder Singh).

Problems related to judicial enforcement in EU countries are quite comparable to those in India. Undue length of proceedings, lack of effective enforcement, excessive costs, insufficient supervision of operations etc. are just the tip of the iceberg. To ensure justice is delivered to the decree-holder in case the judgment holder doesn’t repay, having a sufficient enforcement framework as well as effective enforcement agents is necessary. The former is quite extensively provided for by the CPC, however, the latter requires several reforms at the ground level. In 2003, the Committee of Ministers of the Council of Europe recommended the establishment of competent and efficient enforcement agencies, along with effective procedures such as auction processes and agents, as both are essential components for a properly functioning enforcement system.

Dating back to 1576, France was the first country to regulate court auctions. “Assessors-sellers” were appointed to seize, appraise and sell properties by public auction, as mandated by law or decrees. Over the years, different jurisdictions have adopted varied auction procedures, influenced mostly by the differences in judicial framework, rather than an analysis of what system suits the local requirements the best.

The shortcomings in the established process of court auctions are increasingly being recognized globally. Studies in Japan have confirmed the theory that fewer bidders lower the price of sales. Further, burdened with encumbrances like lien, judicial auctions already lower the sale price by 18-33% as compared to private auctions, as established by a study in Chile.

While variations are seen worldwide, the enforcement procedures can broadly be classified into four categories – court-controlled (Ex: Denmark, Italy), specialized public officials (Ex: Germany, Spain), specialized private agents (Ex: Estonia, Belgium) and a mixed model (Ex: USA, England & Wales). A Latin American study confirms that the court-controlled model is the most prevalent one, not because it works the best, but owing to historical reasons.

Many jurisdictions have variations of court-controlled auction mechanisms, where the judicial deciding authority is vested with the power to appoint an auctioneer and oversee the process to its conclusion. In recent times, Eastern Europe has been experimenting with private or semi-private enforcement agencies, regulated by the courts. Some examples include Estonia, Montenegro and Belgium. This system is characterized by skilled and autonomous private enforcement agencies that are regulated by the state in terms of organization, professional duties, fees, autonomy and minimum qualification required. Different subtypes of this system are found in the rest of Europe where private but highly regulated agents carry out enforcement proceedings. They sometimes enjoy state-vested territorial monopoly but are strictly subject to state-regulated fees.

There nonjudicial enforcement, under the supervision of a judge, has recorded favorable results in different jurisdictions. This is not a new concept – the highly-regulated huissiers who enforce debt is a centuries-old tradition in France and Belgium. In modern times, nonjudicial enforcement has taken the form of a procedure overseen by a notary and the appointment of private bailiffs. These systems have been implemented in Slovakia, Macedonia, Estonia, Lithuania etc. With a clear regulatory system in place (as seen in Macedonia following the new Law on Enforcement in 2005), the entrepreneurial interests of nonjudicial enforcers over debtor’s interests can be curbed, significantly relieving the judiciary’s overburden. Enforcing professional rules, proportionate fee schedules and strict deadlines offering incentives led to an increase in successful debt enforcement from 20% to 50% in the first year alone in Macedonia.

Identifying Shortcomings

There are several shortcomings in the present system of court auctions in India. These auctions are not publicized enough as there is no profit-motive driving the enforcement agencies. While public auctions with poor participation already lower the price of sale (as seen in the Japanese Study), property embroiled in encumbrances attracts fewer sellers. To add to the woes, sufficient information is often unavailable regarding the subject of the auction. 

More often than not, debt defaulters’ own properties that are carefully hidden and highly inaccessible. In such a scenario, it is up to the creditors to uncover such properties and bear costs incurred for the same, substantially impacting their final proceeds from auctions. 

Court-appointed agents also contribute to the deficiencies in court auctions. They seldom consult with the parties involved to arrive at the optimal sale situation. Further, due to the paucity of incentives, there is an inclination to adopt a method of sale requiring the fewest procedural acts. While CPC allows the court to order a re-auction in case of an unsatisfactory sale price, there are no legal provisions to expedite the time taken by the auctioneer. Including timelines in court auctions is tricky. Rigid timelines do not take into account the special circumstances of the asset and the current state of its market however, flexible ones lack enforceability.

While the higher judiciary has called out the failure of executing courts to arrive at an estimated value of the asset to be auctioned, Order XXI does not mandate the same. There is a lack of professional mechanism to estimate the market value and suggest the same to be included in the proclamation. Relying on the recommendations of parties involved, which may or may not be professionally determined, does not always aid in securing the best sale value. 

India predominately deals with court-controlled auctions which are plagued with several shortcomings, mirroring those observed in other jurisdictions. The enforcement reforms that have occurred in other countries have not taken place in India yet. The success of nonjudicial enforcement coupled with the increasing inadequacy of present systems calls for a detailed parliamentary study of best practices in other jurisdictions to implement the same in our country. 

While the CPC provides a substantial legal framework for court auctions, it is still associated with ethical dilemmas in actual functioning. These processes are aimed at disposing off the property at the earliest rather than securing a fair price closest to market value, thus harming the decree holder as well as the judgment debtor. The court-appointed auctioneer has no financial or ethical incentives and hence is indifferent to the woes of the parties. In case of vulnerable populations, there is a possibility of exploitation by buyers, offering to expedite the sale by offering extremely low prices out of auction.

Halsbury establishes that a vendor in an auction can withdraw the property provided it is subject to a reserve that hasn’t been reached. In case ethe same has been reached, the property can still be withdrawn by compensating the highest bidder. With the auction process being court-centric, Order XXI doesn’t allow the judgement debtor to withdraw the property after a proclamation has been made by court according to due procedure (Bahadur Chand). Over-emphasis on procedure as the benchmark for deciding if the auction process is valid or not disregards the rights of parties involved. This may cause financial and emotional distress and thus there is a need to make the court auction process more party centric.

Improvements in the current state of affairs requires legislative reforms as well as streamlining of better & ethical practices at grassroot level. 

• There must be market value assessment and the same must be set as minimum price for auction.

• General processing timelines (that are flexible to suit special circumstances) must be carefully implemented.

• Legislative must undertake to explore private enforcement and implement the same to suit the Indian Scenario. In the meantime, court-auctioneers must be incentivized to promote better performance as well as disincentivized to curb corruption and lackadaisical approach. 

• There must be wide-scale publication auctions to attract larger crowds.

• Court-auctions must be made more party-centric, allowing for departure from established procedural requirements if the circumstance necessitates the same (courts must exercise their discretion).

Considering the drawbacks associated with judicial auctions, many jurisdictions are adopting more efficient and flexible enforcement techniques. While auctions are essential to enforce decrees, they may be unsuitable for certain kinds of assets. Therefore, providing for procedural flexibility, including allowing the creditor to take the collateral in satisfaction of the debt in crucial. Further exploration into the topic of court-auctions is essential to achieve a better understanding about the future steps to be taken in its betterment. The recommended suggestions must be deliberated on by all stakeholders whilst being updated on the best practices in other jurisdictions. This research article hopes to invoke judicial and legislative curiosity into the subject as well as serve as a starting point for the reformative actions to be taken.

CASES

1. Bahadur Chand vs. Madan Lal Etc. ESA-8-2009 (O&M).

2. Unni Madhavan Nair vs. Sreenaranyana Investment W.P.(C). NO.31756 OF 2008 (E.

3. Desh Bandhu Gupta vs. N.L. Anand and Rajinder Singh 1994 SCC (1) 131.

STATUTES

1. The Code of Civil Procedure, 1908 (India).

THE WORLD BANK WORKING PAPER SERIES

1. Gramckow, Heike, Court auctions: Effective processes and enforcement agents (English), Justice and development Working Paper Series; no. 18 Washington, D.C.: World Bank Group 2012.

2. Alvarez De La Campa, Alejandro, Increasing Access to Credit through Reforming Secured transactions in the MENA Region, Policy Research Working Paper 5613, The World Bank, Washington DC 2011.

BOOKS

1. Halsbury Laws of England.

ARTICLES

1. Research Team on Enforcement of Court Decisions, CEPEJ, Strasbourg. "Enforcement of Court Decisions in Europe." European Commission for the Efficiency of Justice 2007. 

2. Council of Europe. 2003. Recommendation of the Committee of Minister Member States on Enforcement., Adopted by the Committee of Ministers, Cour Europe, Strasbourg, September 9.

3. Idee et al., Auction Price Formation and Costly Occupants, Evidence using Data from Osaka District Court, Working Paper 237, Faculty of Economics, University of Toyama 2008.

4. Oh, Soogeon, A Comparative Overview of Asia Insolvency Reforms in the Last Decade, OECD, Paris 2006.

5. Henderson et al., Regional Best Practices: Enforcement of Court Judgements, IFES Rule of Law White Paper Series, International Forum for Electoral Systems, Washington, DC 2004.

6. Paredes et. al, Judicial versus Private Auctions: Better without Protection?, International Society for New Institutional Economics, Nanterre 2009.

7. Elena, Sandra et. al., Barriers to the Enforcement of Court Judgements in Peru: Winning in Court is only half the Battle: Perspective from SME’s and other Users, IFES Rule of Law Occasional Paper Series, International Foundation for Electoral Systems, Washington D.C 2004.

8. Alekand, Aneli, The Estonian Universal Enforcement Procedure and Bailiff as the Taker of Procedural Decisions, Judicial International 2008.

9. Lorenz, Oliver, Macedonia FYR: Court reform – Sustained Multitasking, in “Celebrating Reform 2009: Doing Business Case Studies.” World Bank, Washington DC 2009.