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21 December 2005
On November 23 2005 the Bankruptcy Law (11,101/05) was amended with regard to the reorganization of airlines and aircraft leases. Under the former law, airlines were prohibited from seeking protection. In June 2005 the new law came into effect. The new law, for the first time in over four decades, allows Brazilian airlines to seek protection from creditors under a reorganization scheme called judicial recuperation.
Article 199 of the new law applies to aircraft (and aircraft part) leases. In its original format Article 199 provided that rights pursuant to aircraft mercantile leases would not be suspended by judicial recuperation. Therefore, claims arising from aircraft mercantile leases were not subject to rescheduling or amendment through judicial recuperation procedures.
On June 17 2005, shortly after the new law took effect, Varig Brazilian Airlines filed for judicial recuperation. With regard to its aircraft and engine leases, Varig argued that 'mercantile' leases referred to certain types of finance leases only. All of Varig's fleet consists of leased aircraft and more than 97% of the leases are operating leases. According to Varig, operating leases are subject to judicial recuperation. The Rio de Janeiro Commercial Court accepted Varig's argument notwithstanding legislative history supporting the view that all aircraft leases were to be covered by Article 199.
The Brazilian Congress quickly moved to eliminate the foundation on which the court had based its ruling. There is a fear that leasing costs to Brazilian airlines could rise significantly due to the ruling in Varig.
On November 23 2005 the amendment to Article 199 took effect. The amendment provides in explicit detail that all aircraft leases are exempt from the judicial recuperation process (ie, are not protected by judicial recuperation). Therefore, aircraft lessors' rights, including repossession rights, should not be suspended by a declaration of judicial recuperation. Airlines are still allowed to use the judicial recuperation process - presumably to reorganize non-lease indebtedness - but lessors of aircraft and aircraft parts should not be affected.
However, the amendment provides that these new terms do not apply to cases of judicial recuperation that are already underway, which means that the Varig judicial recuperation process (and a lesser-known process with VASP Brazilian Airlines, which is in judicial recuperation but is not operating) will continue under the original Article 199. In these cases operating leases will probably remain subject to judicial recuperation.
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