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28 September 2011
Declaration on relief pending final determination
Choice of law
Priority of national rights and interests
Entry point for International Registry filings
In recent months Brazil has been inching closer to ratification of the Cape Town Convention on International Interests in Mobile Equipment and the attendant Protocol to the Convention on Matters Specific to Aircraft Equipment.
On May 26 2011 the Senate approved both the convention and the supplementary protocol, completing the last legislative step in the approval process. The last remaining steps are ratification by President Dilma Rousseff and deposition of the convention with the International Institute for the Unification of Private Law in Rome. In accordance with the terms of the convention, the effective date will immediately follow the third complete month after deposit.
The Brazilian aviation industry had expected the president to have ratified the convention by now, but there has been some difference in opinion regarding the need for her express ratification. In any case, it is probable (though not assured) that Brazil will become a Cape Town jurisdiction in early 2012.
Brazil's declaration in relation to insolvency (Article XXX(3) of the protocol) is for Alternative A and the stipulated waiting period is 30 days. Alternative A provides that on the occurrence of an 'insolvency-related event' (eg, bankruptcy restructuring), an aircraft will be returned to its creditor on the earlier of the end of the waiting period or the date on which the creditor would have been entitled to possession (eg, a lease expiry date).
This declaration is in line with the requirements to qualify for export credit agency (ECA) fee discounts, in accordance with the 2011 Aircraft Sector Understanding. Oddly, for commercial aviation, the terms of Alternative A could be considered slightly worse for aircraft financiers than the terms of the current Bankruptcy Law. The law provides no stay for commercial aircraft lessees when seeking bankruptcy protection. The rule is specific to commercial aircraft and does not apply to general aviation, which falls under the general rule of the Bankruptcy Law, providing for a stay of up to 180 days if the debtor can demonstrate that the leased asset is essential to its economic activities.
Over the past two years, a few non-airline aircraft operators have sought bankruptcy protection - mainly meat-processing companies. None of them asserted that their leased aircraft were essential to their core businesses, so the 180-day period did not apply. Over the past year, at least two leased private aircraft have been repossessed from such meat-processing companies in judicial recuperation (ie, restructuring under bankruptcy court protection). The insolvency proceeding was not an impediment to repossession in either case.
Therefore, for general aviation financiers, Brazil's adherence to the convention will represent an improvement on the current law, but in commercial aviation the convention is more generous to debtors than the current Brazilian law. Although the lack of any waiting period has been respected in the last two Brazilian airline bankruptcies, a limited and predictable waiting period may prove to be safer to financiers than no waiting period at all. It provides a sense of equity to aircraft finance that reduces the risk of judicial intervention.
Brazil's declaration in relation to remedies (Article 54(2) of the convention) is that all remedies of the convention require leave of a court, except for the remedy provided in Article XIII of the protocol, which relates to use of an irrevocable de-registration and export request authorisation (IDERA). Consequently, self-help remedies will not be permissible in Brazil. This is unsurprising, as although the concept of self-help remedies is firmly rooted in the common law, civil law tradition has nearly always required court intervention for the exercise of possessory rights over property. Brazilian tradition would not have accommodated self-help remedies easily.
This declaration does not disqualify Brazil from qualifying for ECA fee discounts, and the IDERA exception may prove useful in future repossessions. Most cross-border leases to Brazilian operators require the lessee to provide the lessor with a power of attorney that is similar to an IDERA. However, the utility of such de-registration powers of attorney is untested in Brazil. There have been a few cases, each with unique circumstances, where de-registration powers of attorney have been used to facilitate or process aircraft de-registration. Once the convention becomes effective, the provisions expressly allowing use of IDERAs should enable aircraft lessors or owners to de-register their aircraft after they have secured possession.
Controversy surrounding the value and utility of IDERAs and whether these instruments are repossession enforcement tools in default situations has arisen in other Cape Town jurisdictions, such as Ireland. On the face of it, they would appear to allow a lessor simply to stop an aircraft from operating through de-registration with an aircraft registry. In practice, however, this ultimate power is unlikely to be recognised by any registry without the creditor first securing physical possession through other means such as court orders.
In Brazil, the IDERA may therefore eventually provide some assistance with de-registration and export formalities. However, it will likely take some time to establish the use of IDERAs for export authorisations, since the customs authorities exercise considerable discretion over imports of leased aircraft. At present, aircraft lessors with repossession orders from Brazilian courts are frequently subject to delays in exportation of their aircraft, including aircraft subject to court orders, due to complications with the customs authorities.
Brazil's declaration in relation to relief pending final determination (Article XXX(2) of the protocol) is to incorporate all of the protocol's Article X remedies. 'Speedy relief' is defined as 10 days for Article X of the protocol and 30 days for Article 13 of the convention. These remedies relate to how quickly a lessor can obtain control of a leased asset after filing a complaint. In this regard, Brazilian practice to date has been fairly favourable to lessors, even without the convention. In previous repossession cases lessors have usually been able to obtain preliminary injunctions to repossess aircraft from defaulting lessors within a few days of filing, and a filing has frequently been made on the same day. Thus, the convention reinforces, but does not necessarily improve, initial possessory rights. Most of the cases relating to repossession to date have involved clear payment defaults. Speedy repossession under more technical defaults, financial covenants or cross-defaults from other agreements is less certain.
Brazil chose to apply Article VIII of the protocol, which enables parties to elect the law to govern their agreement. This declaration does not necessarily represent a change in Brazilian aircraft finance, since many practitioners follow the view that parties already had the freedom to select the governing law of aircraft leases. In practice, most cross-border leases into Brazil are governed by the laws of New York or English law, though the laws of other jurisdictions (eg, California or Illinois) are sometimes elected. Brazilian law is used from time to time, but rarely when finance from an international bank or an ECA guaranty is provided. There is a minority view in Brazil that the location of the signatories to a contract or the location where obligations are to be performed could determine governance of an agreement. Brazil's declaration will strengthen the position that parties are free to choose the governing law of aircraft finance agreements.
In accordance with the current and previous aircraft sector understanding in its ratification of the convention, Brazil must revoke its previous ratification of the Rome Convention 1933, concerning the arrest of aircraft in commercial service. The legislative approval of the convention included such a revocation. Brazil is one of relatively few signatories to the Rome Convention, yet in practice this has not prevented aircraft lessors from repossessing aircraft. Although the issue has not been expressly discussed in previous repossession decisions, if the Rome Convention were to apply, a distinction could be made between precautionary arrest, which (as in the maritime sector) can be initiated by any creditor, and repossession of an aircraft by its owner. Arguably, aircraft repossession is not a precautionary arrest. Regardless of the reason, the Rome Convention has not prevented aircraft lessors from repossessing aircraft leased to Brazilian operators.
The foregoing declarations should qualify Brazil for ECA fee discounts. There are at least two additional points of Brazil's implementation of the convention that are not criteria for ECA fee discounts, but that are nonetheless of particular interest to the aircraft financing community - namely, Brazil's declarations on the relative priority of international interests registered with the International Registry against national interests and implementing language concerning Brazil's entry point for international interests.
Under Article 39 of the convention, countries implementing the convention may opt to preserve the priority of national interests over international interests registered at the International Registry. Brazil made such a decision, including a specific declaration allowing the providers of public services to arrest or detain aircraft. In practice, this means that the convention will not alter the current rules in relation to airport and navigational fees. Even before approval of the convention this issue has been controversial in Brazil and the position has been inconsistent.
In the realm of commercial aviation, in most cases leased aircraft have been returned to lessors even though the airline operators may not have been up to date in the payment of applicable airport and navigational fees. The best-known case where this occurred was the Varig Airlines bankruptcy proceeding, where over 80 leased aircraft were returned to lessors in 2005 and 2006 without the need to settle Varig's unpaid airport and navigational fees. However, for private aircraft the position has differed, with aircraft owners and lessors required to settle operators' unpaid fees to obtain final export clearances.
The implementation of the convention will not improve the position of aircraft financiers unless the Brazilian airport authorities exercise greater fiscal prudence with operators. In the past, the authorities have allowed certain financially stressed operators to accrue huge amounts of unpaid fees. If the authorities expect owners to settle such fees eventually, they should not allow the overdue fees to accrue without giving owners or lessors an opportunity to stop operations. Such a system, which would protect both the providers of services and aircraft financiers, may be considered in the future.
The Brazilian Aeronautical Registry (RAB) has been designated as the entry point for International Registry registrations from Brazil. The implementing legislation provides that RAB requirements must be met before the RAB will transmit information to the International Registry. This concept may provoke priority issues in the future. The RAB's registration system records the date on which documents are filed. Subsequent to the filing date, the RAB's lawyers analyse the documents (eg, leases, mortgages or other security documents) and either accept the documents or inform the parties that the filing requires additional supplemental documents. For example, the RAB frequently requests additional incumbency documents demonstrating that signatories had the authority to execute the filed documents.
When the RAB issues such a document request after a filing, the parties have a stipulated period (usually between 30 and 60 days) to supplement the filing with the requested documents. If the parties meet the RAB's request within the stipulated period, priority for the filing continues to date from the original filing date. However, the date on which the RAB concludes that a particular filing has been properly completed could be 30, 60 or even 90 days after the original filing date. This presents a risk of confusion with the International Registry, as it is not clear at what point the RAB will transmit information to the International Registry. In principle, an international interest at the International Registry that pre-dates an international interest transmitted by the RAB should not have priority over the later international interest. Uncertainties in relation to filing priority may be clarified during the implementation period.
Overall implementation of the convention will clarify and therefore improve the respective rights of aircraft financiers and Brazilian aircraft operators. While there are some areas of implementation that will require further clarification in the future, ratification of the convention is a step forward for Brazil and keeps the country in line with international standards for aircraft finance. Brazil's implementation should keep finance available to Brazil's aircraft operators, thus satisfying one of the main objectives of the convention.
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