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08 October 2014
Long-awaited regulations for the implementation of the Cape Town Convention and Aircraft Protocol were promulgated on March 19 2014 (Resolution 309 of the Civil Aviation Agency (ANAC)). The convention has now been in effect for six months in Brazil. Public announcements of the regulations in 2012 and 2013 provided the aviation community with an idea about how the rules would become effective; however, the final form of Resolution 309 has brought a few surprises. In addition, there has been one test of an irrevocable deregistration and export request authorisation (IDERA), which was successful.
Brazil's Cape Town declarations require the use of authorising entry point (AEP) codes for filing international interests over aircraft. Although Resolution 309 refers to aircraft, the International Registry does not accept AEP codes for engines, so the requirement relates to airframes and helicopters only. The Brazilian Aeronautical Registry (RAB) issues AEP codes.
Resolution 309 contains what may be the most restrictive rules of any Cape Town jurisdiction in relation to the issuance of AEP codes. Only persons that have previously registered with ANAC under a system called 'SIGAPD' can obtain AEP codes. To register with ANAC registrants must submit certain personal information and give a written undertaking on a pre-established form (written in Portuguese only) that they will use the AEP codes in accordance with ANAC's rules and regulations and applicable law. The form includes an express submission of the applicant to criminal and civil liability for misuse of an AEP code. In practice this has meant that International Registry filings over Brazilian aircraft are being made by Brazilian-based professional user entities or transacting user entities. Commercial airlines rarely, if ever, request AEP codes or make International Registry filings themselves. Consequently, filings are usually handled by professional user entities hired by leasing companies, financiers or export credit agencies.
The RAB's stated objective is that it will issue AEP codes one business day after application. In practice, the turnaround time has been closer to three to five business days. As the RAB becomes more accustomed to issuing AEP codes, the turnaround time will likely become quicker.
The RAB has issued around 150 AEP codes since the beginning of April 2014, when Brazilian AEP codes first became available.
The introduction of IDERAs is one of the most novel and, for financiers, useful changes introduced by the convention. An IDERA is a variation on traditional deregistration powers of attorney. The main advantage of an IDERA over a deregistration power of attorney is that the Cape Town Aircraft Protocol contains specific provisions on use of IDERAs. Deregistration powers of attorney have suffered from general uncertainty concerning their effectiveness and uncertain rules.
IDERAs concentrate the authority to obtain deregistration and export authorisation of an aircraft with a single party – usually the owner of a leased aircraft or a mortgagee. According to Resolution 309, the RAB will register an IDERA, provided that it complies with the RAB's rules for registered documents, which generally means that it must be signed in Portuguese or accompanied by an English translation. In addition, it must be dated after May 15 2013 for the reasons mentioned below.
The general trend in relation to IDERAs is to sign them in English and Portuguese (in side-by-side columns). In addition, the RAB usually requires the signatures of two witnesses and the notarisation of all signatures on a filed document, including the witnesses' signatures. The IDERA form included in the Cape Town Aircraft Protocol also has a space for the aeronautical authority's countersignature. However, instead of counter-signing IDERAs, the RAB confirms registration through the issuance of confirmation certificates called 'certidões', which show all documents filed in respect of an aircraft, not merely an IDERA.
Brazil's declarations under the convention specifically allow the use of an IDERA without requiring a court order. As a civil law jurisdiction, Brazilian law traditionally prohibits parties from taking action in disputes without the support of a court order. However, an IDERA may be exercised without leave of a court.
Merely two weeks after Resolution 309 was published, an aircraft owner sought to deregister an aircraft using an IDERA. The deregistration application was approved and the aircraft was deregistered. This is significant because the RAB's prior procedure was to act on deregistration requests filed by Brazilian operators (usually lessees) or by foreign owners or mortgagees holding court orders. The RAB acted on the IDERA-based deregistration application in 10 business days, which is double the period mentioned in Resolution 309; however, in this case, the IDERA was filed with the RAB together with the deregistration request, so the additional days were justifiable.
The case was an excellent first precedent, one which demonstrated that the Brazilian aeronautical authorities are aware of the terms of the convention and are prepared to enforce those terms. This case required no particular action from the Brazilian tax and customs service. In addition, the lessee was not actively opposing deregistration; it had already acknowledged that it did not have the financial ability to continue operating the aircraft in question and had already physically redelivered the aircraft to its lessor.
Resolution 309 requires applicants for deregistration to have provided notice to parties that may hold superior rights. This is the main prerequisite of Resolution 309 for IDERA usage.
One of the surprises in Resolution 309 relates to the effective date of the convention in Brazil. Congress approved the convention in May 2011. In September 2011 the president approved the convention and deposited it with the International Institute for the Unification of Private Law on November 30 2011. In accordance with the convention, Brazil's effective date was March 1 2012. However, Brazilian domestic law requires a further implementation decree from the president, which was not issued until May 15 2013. Contrary to general expectations, Resolution 309 stipulates May 15 2013 as the date from which ANAC will issue AEP codes and accept IDERAs. Thus, from a regulatory perspective, the effective date of the convention in Brazil was May 15 2013. It is therefore uncertain whether transactions that took place between March 1 2012 and May 15 2013 will be covered by the convention. While some argue that the convention came into effect on March 1 2012, this has not been questioned or tested in the courts. It is possible that this will never be tested if the issue does not have a material effect on any transaction. Parties that collected IDERAs during this interim period cannot register them with the RAB.
An unexpected issue has arisen in relation to the translation of the expression 'leasing agreement' from English to Portuguese. Article 1(q) of the convention defines 'lease agreement' as:
"an agreement by which one person (the lessor) grants a right to possession or control of an object (with or without an option to purchase) to another person (the lessee) in return for a rental or other payment."
However, the Portuguese translation uses the expression 'mercantile lease'. In older regulations and other legal authorities' publications, including Brazilian Central Bank publications, that expression has referred to finance leases only, excluding operating leases. The plain language of Article 1(q) – which refers to leases "with or without purchase options" and was included in the Portuguese text of the decree implementing the convention – demonstrates that the convention was not intended to apply only to finance leases. Still, the unexpected use of the expression 'mercantile leases' and the possibility of it being interpreted to exclude operating leases from the scope of the convention has caused many practitioners to qualify legal opinions and has cast unexpected doubt over the scope of the convention in Brazil.
To date, the Cape Town experience has been encouraging. The RAB is becoming more proficient and efficient at issuing AEP codes. Further, Brazil's ANAC has demonstrated its knowledge of the terms of the convention and its willingness to enforce them, including deregistration of an aircraft on the basis of an IDERA. Thus far, no court cases have tested the convention in Brazil. To qualify for export credit agency discounts, further clarification may be needed regarding the Portuguese translation of 'leasing agreement' that was used in the applicable Brazilian legislation.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599), fax (+1 561 431 5808) or email (firstname.lastname@example.org). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
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