By Ni Chenliu, lawyer of Shanghai Yingdong Law Firm, one week ago

Introduction: judicial auctions are measures taken by people’s courts to dispose of debtors’ assets after attaching, seizing and freezing such assets.

Different from traditional judicial auction, online judicial auction has emerged with the fast-developing internet technology. After the initial exploratory stage, it was widely implemented in 2016①. The white papers Chinese Courts and Internet Judiciary, published by the Supreme People’s Court on 5 December 2019, contain the following statistics: from the launch of the online auction system to 31 October 2019, more than 3,300 courts have entirely moved their judicial auctions online. Over 1.59 million online judicial auctions have been conducted nationwide, with 436 thousand succeeding and a turnover of 938.7 billion yuan. The take-up rate has arrived at 66.8%, with an 89.8% price premium on average, saving 29.1 billion yuan in commission fees for parties concerned②.

From the perspective of investors, what are the key issues in obtaining industrial assets by judicial auction? What are the strategies to resolve these issues? This article probes into the above questions by analyzing a project that we have recently handled.

I. Main process of online judicial auctions

II. Analysis of the auction of a company’s industrial assets

1. Project overview and main questions

a) Company A, a chemical manufacturer, failed to pay debts when due and as a result its creditors applied for enforcement against Company A. Online judicial auction procedure has thus been initiated as regards its pledged assets (including land use rights, plant buildings and machinery). According to applicable provisions on online judicial auctions, if Company A’s assets have been put up for auction twice and both auctions have failed, such assets would then be sold off;

b) Company B has been in the chemical industry for years and has leading advantages. In view of industrial planning, Company B intends to obtain Company A’s industrial assets by auction when such assets are put up for auction for the second time.

Company B has posed the following questions about the intended transaction:

a) How to verify whether the current condition of the auction items accords with the list in the evaluation report?

b) How to find out whether there are additional fines and late fees etc.?

c) What should be done about taxes?

2. Initial analysis

Based on Company B’s auction announcement and after going through all Company B’s information in relation to litigation, we have made the following initial suggestions:（原文是否应为A公司？） 

a) Verifying the actual condition of the auction items:

For investors (bidders), information obtained from judicial auction announcements, auction instructions and other documents available to the public might not be 100% consistent with the “actual condition” of the auction items. Besides, an auction announcement normally states that “the items are being auctioned off on an “as is” basis and the court does not give any guarantee against any defect in these items”. Bidders should therefore preview the items on-site before bidding. Bidders bidding on an item before viewing it are deemed to have acknowledged the condition of such item. In terms of industrial assets, it is more important to find out whether there are other users of the land or plant buildings and whether a clear-out would be difficult as these would affect the operations after winning the bid.

b) Additional fines and late fees

As a chemical manufacturer, Company A might have been imposed on fines and late fees of considerable amounts by water and electricity authorities. The buyer will have to bear such additional amounts and deal with the consequences. In practice, it is not easy for bidders to inquire such amounts of the debtor or the water and electricity suppliers. Instead, they need to request the details of the auction items from the auctioning court and try to learn the specific amounts owed.

c) Taxes

According to the auction instructions, “the buyer shall complete the formalities for registering the transfer of the auction items, and any taxes incurred in the course of the transaction shall be borne by the buyer.” In particular, if the auction item is the right to use industrial land, the successful bidder may incur a large amount of land value-added taxes. In this scenario, it is necessary to confirm whether expenditures not supported by invoices can be included into the cost of acquiring the object property so as to reduce the amount of taxes.

III. Main risks of and suggestions about acquiring industrial assets by auction.

When attending an auction (for industrial property), investors need to at least pay attention to the following risks:

1. The completeness of the existing title to the property

Suggestions:

a) Referring to the certificate of title and evaluation report;

b) Inquiring about the land and property registration records of transaction centre, bureau of land and resources, real estate administration, and real estate transaction centre;

c) Inquiring whether there is any co-owner of the land or property, and checking the compliance of the nature and use of the land.

2. The completeness of the right to use the property

Suggestions:

a) Reviewing court documents and examining the premises;

b) Checking whether there are easement restrictions, common area restrictions and any other inconvenience to the use of the property, such as areas shared with a third party, any passage going through another company or any other company’s passage going through the property;

c) Inquiring whether the property needs to be vacated by any other tenant;

d) Checking whether there are boundary walls, firefighting facilities and green areas that are not included into the auction and, if so, how to deal with them;

e) Checking whether there is chemical waste to be disposed of, and whether sockets, voltage and steam pressure in the premises are normal.

3. The completeness of the existing ownership of and right to use the machinery

Suggestions:

a) Reviewing court documents and examining the premises;

b) Checking whether the machinery, as movables, is complete or old and incomplete that its value and use would be affected;

c) Inquiring whether there is attachment by any other court, lease, other movable mortgage, or financing lease;

d) Inquiring whether full payments have been made for purchasing and installing all machinery and whether there remains any outstanding debt for the buyer to pay.

4. Whether there is obstacle to the transfer of the property title

Suggestions:

a) Checking whether there is any illegal construction, violation of planning, or any other obstacle to the transfer of the property title;

b) Checking how long the change of title will take and whether it is significantly longer than a normal procedure for changing titles.

5. Estimating additional costs of taxes and fees incurred in transferring the ownership of the property and machinery

Suggestions:

a) The buyer needs to bear all costs incurred in the transfer of ownership;

b) Checking whether the buyer needs to bear the taxes, fees, arrears and fines incurred by the seller;

c) Checking whether there is room for consultation about these additional taxes and fees before the issuance of the sales announcement so that the buyer needs not bear such taxes or fees.

6. Risks in rebuilding and starting operation after the transfer of ownership

Suggestions:

a) Checking whether the address of the property is used as the registered office address by many companies, and whether the shareholders of such companies can be located and asked to sign an agreement to move out, otherwise the buyer may have difficulty in incorporating a company on the property;

b) Checking whether it is necessary and possible to re-pass safety and environmental assessment, quality supervision, and firefighting system assessment;

c) Estimating the costs of maintaining, rebuilding, and restarting operation on the property, including waste pollution cleanup, restoration of stolen machinery, and restoration of public equipment.

Conclusion: this article is mainly based on the analysis of an auction of industrial assets. Specific projects concerning the auction of other industrial assets should be analyzed on a case-by-case basis in the light of the difference in the industries and assets concerned (such as land, plant buildings and machinery). We hope this article will serve as a basic guidance for any market entities participating in the auction of industrial assets.

① Notice of the Supreme People's Court on Issuing the Opinions on Strengthening and Regulating the Work of Online Judicial Auction by People's Courts, effective as of 1 January 2016.

② News released by the Supreme People’s Court: http://www.court.gov.cn/zixun-xiangqing-205451.html