We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
28 November 2012
In May 2011 Congress approved Brazil's adherence to the Cape Town Convention on International Interests in Mobile Equipment and the associated Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (collectively referred to as the 'convention'). On September 16 2011 President Dilma Roussef signed a letter of adherence approving the convention and on November 30 2011 the Foreign Ministry deposited it with the International Institute for the Unification of Private Law (Unidroit). According to the terms of the convention, the effective date in Brazil would be March 1 2012; however, Brazil's legal system requires publication of a further executive order for the convention to be fully implemented. This executive order could be published any day.
Notwithstanding that full implementation of the convention is pending the executive order, the government recently announced proposed rules and procedures concerning how 'international interests' (as defined in the convention) over aircraft registered in Brazil may eventually be made with the International Registry in Dublin. In addition, the procedures for the use of irrevocable de-registration and export request authorisations (IDERAs) have also been announced by the government. This update summarises the information available at this time.
One of Brazil's declarations under the convention is that the Brazilian Aeronautical Registry (RAB) will serve as an 'authorising entry point' (as defined by the convention). When Brazil's legislation on the subject first became available, there was some concern that the language of the legislative approval would mean that the RAB would be classed as a 'direct entry point', which would have required the RAB to transmit the relevant information concerning international interest filings to the International Registry. The RAB has publicly announced its understanding that the legislation provides for it to be an authorising entry point and not a direct entry point, and to date there seems little doubt that this position will prevail.
As an authorising entry point (AEP), the RAB must issue AEP codes to parties that intend to file international interests with the International Registry. The parties then make their filings online direct with the International Registry, including the AEP codes in the transmitted information. Other Cape Town jurisdictions that use the authorising entry point system include the United States, Mexico, China and the United Arab Emirates. Although it is not yet issuing AEP codes (due to pending publication of the executive order), earlier this year the RAB announced that its procedures for the issuance of AEP codes will likely be as follows:
Implementation of this system will allow the RAB to monitor closely the use of its AEP codes. The RAB's ongoing scrutiny of the use of its AEP codes will be one of the most stringent of any Cape Town jurisdiction. This scrutiny appears in line with the Brazilian government's desire to adhere to the convention while retaining some control over international interests over Brazilian aircraft registered at the International Registry.
The RAB has indicated that AEP codes will be issued electronically, and that relevant information must be submitted in the same manner. At present, national interests are filed in person at RAB offices, usually the RAB's headquarters in Rio de Janeiro. Allowing for compliance via electronic communications is expected to streamline the procedures.
According to the official commentary to the convention, as engines are not registered on national registries, they do not require AEP codes for international interest filings. Therefore, in principle, it is now possible to file international interests on engines in Brazil, though this practice has not been widely adopted.
The convention's aircraft protocol introduced IDERAs, but there has been some debate in different jurisdictions concerning their use as a repossession tool in aircraft finance. In presentations made by officers of the RAB this year, IDERAs have been described as an "additional guarantee afforded to creditors in cases of defaults". This seems to set the tone for the future use of IDERAs in Brazil.
The RAB has stated that once the convention is in full effect in Brazil, the following rules will be applied:
If these criteria are followed, the RAB is expected to de-register the relevant aircraft within five business days of receiving a request.
These rules expressly relieve a creditor of the duty to submit an aircraft's original certificate of airworthiness to the RAB. At present, one of the usual requirements for de-registration of aircraft is submission to the RAB of original certificates, such as those relating to airworthiness and registration. For leased aircraft, these originals always remain in the possession of the lessee, and in some instances have been hidden from repossessing lessors in an attempt to slow down the de-registration procedures. The RAB's recognition of this problem demonstrates that members of the RAB have given considerable thought to the IDERA procedures that they intend to adopt.
The notice requirement to the debtor is fairly easy to understand; however, the requirement to provide notice to guarantors "and any other party with rights over the asset" is less certain. Such parties may include owners, lessors, registered mortgagees and registered assignees, one of which would presumably be the party seeking to enforce the IDERA in the first place. The RAB is expected to clarify this requirement in future rules.
However, financing parties are concerned about the IDERA procedures in relation to export authorisations. At present, in addition to obtaining de-registration from the RAB, the Brazilian tax authorities must issue certain export authorisations. Without these authorisations an aircraft may not be permitted to leave Brazil, even if it has been de-registered. If these impediments remain the objective of including an export authorisation in an IDERA will not have been fulfilled. Members of the RAB have informed the aviation community that they are in discussions with the Brazilian tax authorities to ensure that the provisions of the convention, once fully approved by the executive order, are implemented. At present, export authorisations are one of the most difficult hurdles to repossession, in part because the importer (usually a Brazilian lessee) is the party with the standing to request export authorisations, and in default and repossession scenarios, lessors or other creditors may need to obtain these. The RAB's announced procedures, which include coordination with the tax authorities and compliance with the convention's provision of speedy relief to creditors, will improve considerably for the export and deregistration procedures.
When Brazil deposited the convention with Unidroit approximately one year ago, it was rightly hailed as a considerable achievement for the success of the convention. Brazil is an example of how a civil law jurisdiction can adopt the convention with declarations that should qualify its airlines and operators for export credit agency discounts in accordance with the aircraft sector understanding, while maintaining its civil law tradition. Brazil's declarations represent a balance between the respective rights of debtors and creditors. The delay in full implementation of the convention in Brazil this year has been a disappointment, but this delay is expected to end eventually. The procedures that the RAB has announced for obtaining AEP codes show how a country can accept the convention and still retain considerable control over international registrations made in respect of its registered aircraft. The procedures announced for the use of IDERAs, when implemented, will place Brazil among the safest jurisdictions in the world for aircraft financing. It is hoped that the implementation delay will end soon so that Brazil's operators and their creditors can begin to take advantage of the benefits of the convention.
The procedures described in this update have been announced; however, until they are formally promulgated, they are subject to change.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.