The collection of a claim by way of compulsory enforcement most often ends in the attached assets being converted into money. Because that conversion is carried out through the exercise of public power, the legislation regulates every stage of the sale in detail. Where the rules are breached, what emerges is not merely a technical procedural error but frequently a serious consequence, such as the debtor losing his assets below their true value.
The setting aside of the auction is precisely the mechanism that opens the lawfulness of a completed compulsory sale to judicial review. A debtor, creditor or other interested party whose interests are impaired by the sale, and who takes the view that there has been a procedural irregularity in the auction process, may have recourse to this route and request that the auction be set aside.
Below we assess in turn which irregularities may lead to the auction being set aside, to whom the right of application is granted, the preclusive periods, the financial burden of the application and the conduct of the proceedings.
The Concept of Setting Aside an Auction
Movable and immovable property attached in enforcement proceedings is converted into money by the enforcement office upon the creditor’s request for sale. The ordinary method of conversion into money is the public auction, and every stage of the auction is subject to the framework drawn by the Enforcement and Bankruptcy Act No. 2004.
For details concerning the process as a whole, our note entitled The Sale and Auction Process for Property Attached Through Enforcement may be consulted.
Conducting the sale contrary to the legislation — for instance, the notice being published incompletely, the value ascribed to the immovable property being incorrectly determined, or the auction being held irregularly — raises the question of the sale being rendered invalid. That possibility is regulated in Art. 134 and the following provisions of the Enforcement and Bankruptcy Act No. 2004, and in particular in Art. 134(2).
Enforcement and Bankruptcy Act No. 2004, Art. 134(2)
“The setting aside of the auction, including on the grounds set out in Article 281 of the Turkish Code of Obligations No. 6098 dated 11 January 2011, may be requested from the enforcement court by way of complaint, within seven days from the date of the auction, only by the creditor who requested the sale, the debtor, the interested parties registered in the official register of the attached property and the holders of limited rights in rem, together with those who took part in the auction by bidding, on condition that they indicate an address within the country. Interested parties are deemed to have obtained knowledge, at the latest on the day of the auction, of the irregularities in the transactions occurring up to the moment the auction was held.”
The provision affords the creditor who requested the sale, the debtor, the interested parties registered in the official register of the attached property, the holders of limited rights in rem and those who took part in the auction by bidding, where they assert that there has been an unlawfulness in the auction, the possibility of lodging a complaint with the enforcement court within seven days running from the day of the auction.
Although in practice this application is referred to as the “action for the setting aside of the auction”, in technical terms it is not an action but a complaint. That character causes the process to depart from the ordinary procedure applicable to actions and to be concluded appreciably more quickly.
Setting Aside and Cancellation Are Not the Same
Although in the law of compulsory sales the terms “cancellation” and “setting aside” arrive at a similar result, the legal basis on which they rest and the stage at which they come into play differ from one another.
Cancellation of the auction describes situations in which the sale was never completed and the auction therefore never acquired validity. Examples include the bid made remaining below the appraised value, the highest bidder failing to deposit the price within the statutory period, or the delivery of the property that is the subject of the sale becoming legally or factually impossible. In the situations listed, the auction produces no effect and is deemed to have been cancelled; cancellations of this kind are for the most part administrative in nature and as a rule require no separate application to a court.
Setting aside the auction, by contrast, is the invalidation by court decision of a sale that has been validly concluded, on the ground of irregularities identified subsequently. Here the sale has produced its effects; but defects such as an incomplete notice, an erroneous valuation or a breach of the auction procedure are made the subject of a complaint and the setting aside of the sale is requested.
To summarise the difference in a single sentence: cancellation concerns the fate of a sale that has not been concluded, whereas setting aside concerns a concluded sale being subsequently held invalid by judicial means.
Which Irregularities Count as Grounds for Setting Aside?
The enforcement court can assess a request for setting aside only where a concrete unlawfulness relating to the auction process is demonstrated. Subjective assessments to the effect that the sale was “unjust” produce no result on their own; the ground relied upon must rest upon a procedurally defective act. The grounds most frequently encountered in practice are the following:
- Rigging of the auction: interventions such as the use of deception, threats or coercion, breach of the prohibition on participation and the obstruction of competition in the auction.
- Irregular service of process: the notice of sale not being duly served on the debtor, the creditor or the other interested parties; this defect results in an infringement of the right to participate and to defend one’s position.
- Irregularities relating to the notice: the notice not being published at all, non-compliance with the statutory periods or with the rules on form and content, or the notice being issued with incomplete information.
- Errors made at the preparatory stage: the valuation not being completed within time, the expert examination being left incomplete, or the date of sale being fixed contrary to the law.
- Irregularities during the auction: the public auction being conducted without compliance with the prescribed procedure and principles, the duration of the auction being restricted inappropriately, or the sale being conducted in a manner lacking publicity.
- The valuation being erroneous: the property being shown at far below its true value, no expert opinion being obtained when the valuation was carried out, or comparable sales not being taken into account.
- Defects and errors in the terms of sale: the characteristics of the property being described incompletely or misleadingly, or its legal position not being clearly set out; defects of this kind may cause purchasers to be misled.
- Mistake as to the essential qualities of the property: the sale of property of a different character from that described in the notice; for instance, it emerging that an immovable advertised as a dwelling is in fact unusable.
- Participation in the auction by disqualified persons: bidding by persons stated under the Enforcement and Bankruptcy Act No. 2004 to be ineligible to participate in the auction, such as the officials responsible for the sale.
- Conduct contrary to morality within the meaning of Article 281 of the Turkish Code of Obligations No. 6098: the purchaser resorting to methods contrary to law or to morality, such as using forged documents or conferring a benefit on officials in order to win the auction.
Who Has the Right to Apply?
The persons who may request the setting aside of an auction are listed exhaustively in Article 134(2) of the Enforcement and Bankruptcy Act No. 2004. According to that list, the right of application belongs only to the creditor who requested the sale, the debtor, the interested parties registered in the official register of the attached property, the holders of limited rights in rem and those who took part in the auction by bidding.
Moreover, the interested party having recourse to the complaint procedure must demonstrate that his own interests have been impaired by the irregularity alleged. In the practice of the Court of Cassation, that interest is required to be of a direct and current nature.
The Time Limit for Applying and Its Preclusive Effect
The request for setting aside is subject to a preclusive period; the calendar must therefore be followed scrupulously. Where the period is missed, the right of complaint is extinguished even if there truly was an unlawfulness in the auction.
The interested parties listed in the statute may request the setting aside within seven (7) days following the date of the auction. As regards irregularities in the transactions carried out up to the moment the auction took place, the interested parties are presumed to have obtained knowledge at the latest on the day of the auction.
By contrast, where the notice of sale was not served, or where a mistake as to the essential qualities of the property or the rigging of the auction came to light subsequently, the period begins to run on the date of knowledge. Even in that case, however, the outer limit for the application is one year following the date on which the decision that the auction was held was published on the electronic sales portal; that period cannot be exceeded.
Fees, Security and the Disciplinary Fine
The Fee Payable
A debtor, a creditor who requested the sale, holders of limited rights in rem and interested parties registered in the official register who request the setting aside pay a fixed fee.
The regime is different, however, for those who took part in the auction by bidding; such persons are subject to a proportional fee calculated on the auction price. Half of that fee must be deposited in advance at the moment of the request. If the request is allowed, the fee is not imposed on another person and is refunded upon request. If the request is dismissed, the portion taken in advance is not returned; the balance of the fee is also collected from the person who requested the setting aside.
The Security to Be Provided
Those who take part in the auction by bidding must, when submitting a request for setting aside, provide security amounting to five per cent of the auction price in order to cover the loss the interested parties may sustain.
The Risk of a Fine
Since a request for setting aside leads to a consequence as serious as the annulment of the sale, the legislature has provided for a fine in Art. 134(5) of the Enforcement and Bankruptcy Act No. 2004 in order to deter unfounded applications made in bad faith.
If the enforcement court dismisses the request in the following situations, it may impose a disciplinary fine on the applicant; the fine is capped at 10% of the auction price:
- Application by a person having no right to request it. The power to request setting aside is confined to the debtor, the creditor who requested the sale, the holders of limited rights in rem, the interested parties registered in the official register of the attached property and those who bid. If someone falling outside that framework lodges a complaint, a fine may be imposed.
- Waiver of the request. A person who does hold the right of application may be held liable for the fine even if he withdraws his complaint after having raised it.
- Dismissal of the request on the merits. Where the application was made within time and in due form but was dismissed because no unlawfulness was identified in the auction, the court may impose a disciplinary fine together with the decision of dismissal.
How the Proceedings Operate
Subject-Matter and Territorial Jurisdiction
As a rule, the enforcement court of the place where the enforcement office that held the auction is situated has both subject-matter and territorial jurisdiction.
Where, however, the immovable property was sold by public auction by way of the Dissolution of Co-Ownership (partition), jurisdiction to examine the request for setting aside passes to the Civil Court of Peace. As to territorial jurisdiction, the court of the place where the enforcement office or the sale office is situated is taken as the basis.
Where the complaint is directed to a court lacking subject-matter or territorial jurisdiction, that court gives a decision declining jurisdiction within ten days at the latest from the date on which the application was made. The file is transmitted to the enforcement court having subject-matter and territorial jurisdiction, the cost being met from the advance on costs.
The Procedure to Be Applied
Simplified procedure and expedited examination
Complaints of this kind are heard before enforcement courts under the simplified procedure. The procedure is confined to the mutual exchange of pleadings and the holding of a hearing is not mandatory. The judge may give judgment on the basis of the file, or, where he considers it necessary, may summon the parties and hear their oral submissions as well.
The court’s review is confined to the complainant’s request. Put another way, only the grounds for setting aside that have been raised are examined; no review extended of the court’s own motion is carried out.
Evidence and the Burden of Proof
Although the examination proceeds more rapidly than in ordinary proceedings, the parties’ obligation to prove their allegations continues unchanged.
The person requesting the setting aside must demonstrate the irregularity or unlawfulness on which he relies by means of concrete evidence. An application resting on allegations that remain merely abstract cannot be expected to be allowed.
At this stage the principle of freedom of evidence applies. Written documents, UYAP records, witness statements, expert reports and official documents in their entirety are all among the types of evidence that may be submitted to the court. Taking into account the circumstances of the concrete case, the enforcement court gives its judgment by assessing whether the evidence placed on the file is sufficient and convincing.
The Consequences of the Decision
If the Application Is Allowed
If the enforcement court finds a duly lodged complaint well founded, it allows the request for setting aside. With that decision, the sale carried out by way of auction becomes legally invalid; it produces effects as though the sale had never taken place and is extinguished with all its consequences.
The finality of the decision setting aside the auction terminates, with retroactive effect, the right of ownership of the successful bidder over the movable or immovable property. Possession of the property, or the entry in the land registry, reverts to its position before the auction.
The auction price deposited by the purchaser with the enforcement office and invested with a bank by the enforcement directorate is likewise returned to him together with the interest accrued. In the result the purchaser loses ownership but recovers the payment he made.
If the debt remains unpaid, the creditor may, after the setting aside, request that the same property be sold again. In that case the sale and auction process is conducted afresh from the beginning.
If the Application Is Dismissed
If the enforcement court identifies no irregularity in the sale process and considers the complaint devoid of legal foundation, or finds that the time limit and the rules of form applicable to the application were not complied with, it dismisses the request for setting aside.
Once the decision of dismissal becomes final, the sum deposited with the enforcement office is paid out as the auction price, together with the returns accrued, to those entitled. As regards the property that was the subject of the sale, there are two possibilities:
- In the case of movables, the property is physically delivered to the purchaser.
- In the case of immovables, registration is effected by a letter written to the Land Registry Directorate.
Moreover, by express provision of the statute, the person whose request is dismissed may as a rule face a disciplinary fine; the upper limit of the sanction is 10% of the auction price. This sanction was introduced in order to forestall unfounded applications made in bad faith.
Independent Legal’s Assessment
Because of its seven-day preclusive period and the limited scope of review bound by the request, the setting aside of an auction is a legal route that leaves little margin for error. In practice a significant proportion of applications come to nothing not because there is no irregularity on the merits, but because the period was missed or the impairment of interest could not be made concrete. When the obligation to pay a proportional fee and to provide security is assessed together with the possibility of a disciplinary fine, the financial risk of the application is likewise at a level that cannot be disregarded.
For that reason, beginning to monitor the sale file before the day of the auction is in most cases more decisive than the work to be carried out at the setting-aside stage. In a concrete dispute the following headings should be addressed first:
- Reviewing, on the basis of the documents, the procedural regularity of the records of service and of the notice of sale
- Establishing the date on which the seven-day period began to run and, in cases resting on knowledge, documenting that date separately
- Clarifying from the outset whether the applicant is among the interested parties within the scope of Art. 134(2) of the Enforcement and Bankruptcy Act No. 2004
- Setting out in full in the pleading the grounds for setting aside to be relied upon, bearing in mind that the court is bound by the request
- Calculating in advance, for those taking part by bidding, the burden of the proportional fee and of the five per cent security
- Assessing from the outset the risk of a disciplinary fine that will arise should the request be dismissed
Independent Legal provides advisory services and conducts litigation at every stage, from the review of the auction process in sales carried out by way of compulsory enforcement to the pursuit of a complaint for setting aside.