Online auctions

As the deferral period ends on 1 September 2020 and the latest amendments to the Enforcement and Security Law (Official Gazette of the Republic of Serbia, Nos. 106/2015, 106/2016 – Authentic Interpretation, 113/2017 – Authentic Interpretation, and 54/2019) become effective, auctions of movable and immovable property in enforcement proceedings are set to move online.

This article explains the reasoning behind the introduction of online auctions, describes how these sales will work, and discusses how online auctions are expected to improve the overall effectiveness of enforcement proceedings.

Why online auctions?

According to the explanatory statement accompanying the amendments to the Enforcement and Security Law, the primary objective of online auctions is to prevent abuses of the auction procedure. These abuses are defined as illicit actions taken by natural and legal persons to obstruct the course and outcome of auctions, either by inducing other bidders not to bid higher or by fraudulently bidding higher and then not going through with the purchase.

In addressing this issue, online auctions intend to promote equal participation of all interested bidders, achieve transparency and fairness, ensure that all information on each sale is properly disclosed, and asset prices to be properly discovered without being unduly influenced by any abuse.

As price discovery is crucial to the success of any auction, which, in turn, allows enforcement to attain its primary objective – ensuring that creditors are able to recover their debts as set out in enforceable titles or authentic documents – there are also other, less obvious reasons why online auctions will lead to greater effectiveness of the enforcement procedure.

Firstly, online auctions will facilitate asset sales and broaden the range of potential bidders by making sales announcements, with asset photographs, videos, and descriptions, available on the online auctions web site. This marks a major departure from the current approach, whereby the asset sale conclusion is posted on the notice boards of the court and the Chamber of Enforcement Officers, which has proven ineffectual in allowing the broader public to learn about future auctions.

The anonymous online approach is also expected to address the reluctance of prospective bidders to take part in auctions where debtors are physically present, due to either personal reasons or ties with debtors (who may be their neighbours or acquaintances). This will extend the range of bidders and increase competition, which will have the knock-on effect of achieving higher prices. 

Moreover, as bidding will now remain open from 9 am to 1 pm, bidders will have more time to re-assess how high they are prepared to bid, in contrast to the current practice of ‘auction hearings’, which do not allow prospective buyers time to examine what their final price may be away from the stress of a physical auction.

As such, even though online auctions are primarily intended to address abuse, which is both an issue in itself and hinders proper price discovery, they will also make a major contribution to achieving recovery for creditors, which is the primary purpose of enforcement.

What will online auctions look like?

Anyone wishing to take part in an online auction will have to register on the online auctions web site at https://eaukcija.sud.rs/. Users must provide an electronic signature and the required information and will have to pay an annual registration fee of 2,000 dinars. Auction announcements will be visible to unregistered users, together with real-time display of the highest bid for each active auction, but only registered users will have access to bidding history and may make bids.

Applications to take part in an online auction must be made at the latest two days before the auction is due to take place and have to include proof of payment of the auction deposit and, where a bidder intends to be represented by a proxy, the relevant power of attorney.

Once the application window has closed, the acting enforcement officer will verify the eligibility of applicants and check whether general requirements for the sale have been met. The enforcement officer must confirm that the sale can go ahead at the latest one hour before the scheduled opening time.

The actual bidding is fully automated, with bidding increments set in advance. Each bidder can make an incrementally increased bid, except for the bidder with the highest bid at any given time. In yet another anti-abuse feature, each bid is also individually verified by means of the bidder’s electronic signature.

Participation by proxy is also possible, provided that the prospective participant applies personally and submits the relevant power of attorney for their representative. Applicants may provide existing powers of attorney or issue new ones using the online auctions web site. A power of attorney may be valid for all auctions the issuer wishes to take part in, or only for one particular auction (this can additionally be restricted to a maximum bid the proxy can make at auction).

An online auction can be closed if it cannot or no longer needs to be completed (for instance, if multiple assets were put up for auction, and one is sold at a price sufficient to ensure full recovery for the creditor). Additionally, the Online Auctions Regulation (Official Gazette of the Republic of Serbia, No. 14/2020) permits the auction to be suspended in the event of a service disruption, and can be continued provided this is announced on the online auctions web site at least 48 hours in advance.

After an auction is completed, the enforcement officer receives a detailed report which is then shared with all participants, together with the conclusion on the sale of the asset.

How are online auctions expected to increase effectiveness?

Online auctions are an entirely new approach to selling assets, which has hitherto relied on physical auction meetings, or ‘hearings’. Accordingly, issues that have plagued the current system (such as abuse of the process by ‘professional buyers’, inadequate auction visibility, and the like) will no longer occur, as the online format inherently prevents them.

As such, the overall effectiveness of online auctions should be assessed by the extent to which they will promote the objectives of auctions and of enforcement in general. In addition to the benefits described above, online auctions will allow optimal price discovery, which makes them a major step forward in enforcement proceedings.

There are a number of challenges, however, that may threaten the attainment of these objectives.

The first issue has to do with the technical sophistication of prospective bidders in Serbia. More specifically, online auctions require access to a computer and the internet, basic computer literacy, an electronic signature and reader equipment, and motivation for taking part in a non-traditional auction.

According to the Serbian Office of National Statistics, in 2019, over 80 percent of Serbian households had internet access, and more than 95 percent of individuals with such access regularly went online. However, no more than 43.9 percent of the population used the internet to buy personal goods and services. Judging by experience, the percentage of Serbians ready to purchase real estate or valuable immovable property online can only be lower than this figure.

So, even though the online approach allows anyone with internet access to view and take part in auctions, in practice there are a limited number of people who do use the internet for these purposes and possess the required skills and tools. This means prospective bidders will have to bring their computer literacy up to scratch, and one can expect the market to initially offer assistance with online auctions to overcome this challenge.

A second possible obstacle to optimal price discovery at auction is how the price is arrived at. Currently, both the software and the Regulation prevent a bidder with the highest bid at any time from making an incrementally increased bid. The explanatory statement accompanying amendments to the Enforcement and Security Law offers no particular clarification on this point, but the assumed intent is to prevent abuse involving artificial price raising.

Nevertheless, not all instances of price raising constitute abuse. In practice, raising prices was often found to be necessary to allow the underlying debt to be cleared by having the enforcement creditor purchase an asset, ensure an appropriate price for a buyer found by direct negotiation, or in the context of the various repayment arrangements agreed between creditor and debtor. Even if none of these reasons was sufficient to overcome concerns with potential abuse, achieving as high as possible a price at auction is in the interest of all parties in enforcement proceedings. As such, and especially given the stated aim of enforcement, it would be difficult to justify any arrangement that prevents auctions of either real estate or movable property from raising more money for creditors. 

Technical issues are certainly to be expected, but, overall, online auctions doubtlessly have many more strengths than weaknesses.

Online auctions are a modern, technology-driven solution that is set to revolutionise enforced sales, making them more accessible and effective. Their intended aim is true to the spirit of enforcement proceedings, and we therefore look forward to their introduction.

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