Aviation Finance & Leasing 2019 Comparisons

Last Updated July 29, 2019

Contributed By Veirano Advogados

Law and Practice

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Veirano Advogados is a full-service, independent law firm offering legal services in all areas of corporate law. It combines legal expertise, commercial vision and commitment to navigate the most complex transactions and challenges, assisting clients ranging from startups to global companies, and from disruptive technologies to heavy industries. The lawyers’ multidisciplinary background and broad experience enable the firm to approach each problem from every relevant angle and to design strategic solutions for the most complex challenges, when and where they arise.

There is a risk of a capital gains tax being imposed on the transfer of title over aircraft located in Brazil, even if neither the transferor nor the transferee is Brazilian. Please note that the location of execution and delivery of a bill of sale is irrelevant to assess such tax on aircraft sales.

The sale will be valid when it is registered with the Brazilian Aeronautical Registry (the “RAB”); a bill of sale normally suffices for this purpose. As for any document in a foreign language filed with the RAB, the bill of sale must be translated into Portuguese and notarised. If executed abroad, the bill of sale must also be legalised at a Brazilian Consulate or apostilled in jurisdictions where the Hague Convention has been ratified. In order to be valid against third parties, a bill of sale signed outside Brazil must also be registered with a Registry of Titles and Deeds (“RTD”).

Further to the requirements mentioned above, in order to perfect the title transfer, a bill of sale must also contain full qualification of the parties (buyer/seller), reference to the price being paid (though a simple reference to “good and valuable consideration” would be accepted by the RAB), and the signature of all the parties (including the buyer) and two witnesses.

Aircraft sales usually extend to the installed parts in addition to the airframe. It is advisable to insert a full description of the equipment being bought and sold in the bill of sale in any case.

The sale of ownership rights in an entity that owns an aircraft or engine will not be recognised as a sale of the aircraft or engine itself.

For Brazilian registered aircraft, the bill of sale must be governed by Brazilian law in order to be effective in Brazil. 

Please see above, and note that bills of sale need to be signed in front of a notary and notarised “by authenticity” (reconhecimento por autenticidade/verdadeiro).

The bill of sale must be registered with the RAB (and in some (unusual) circumstances with an RTD, as explained above).

Please see above concerning the necessary formalities.

The RAB has a 30-day statutory deadline in which to complete registrations.

No government applications or consents are required as a prerequisite to the execution and delivery of a bill of sale.

Only capital gains taxes could be applicable for aircraft located and/or registered in Brazil. If there is no capital gain from the sale of an aircraft, then no taxes are payable.

Any operating/wet/finance leases or leases concerning only engines or parts are recognised in Brazil. In order to be enforceable, such leases must be translated into Portuguese, signed by two witnesses, notarised and registered with the RAB.

Leases can be governed by a foreign law.

Payments to foreign lessors in US dollars are subject to strict foreign exchange controls. The operator must register the financial terms of the lease with the System of Information of the Central Bank of Brazil ("SISBACEN"). Such registration is known as the "ROF" (acronym for financial transaction registration). The only exception to such registration applies to leases with terms of less than 12 months. Please note that ROFs approve regularly scheduled payments due under the lease (eg, rent), but irregular payments such as default interest or losses and damages must be approved by the Central Bank on an ad hoc basis before remittance.

Please see Restrictions Concerning Payments in US Dollars, above.

A foreign lessor will not be subject to any tax in Brazil as a result only of the execution, delivery and performance of a lease. However, in accordance with Brazilian requirements, a foreign lessor must obtain a Brazilian tax identification number (known as a "CNPJ") in order to receive payments due under a lease. Obtaining this identification number will not lead to a permanent establishment.

It is not necessary for a lessor to be licensed, qualified or entitled to do business in Brazil, and no party (other than the domestic lessee) to a lease will be deemed to be resident, domiciled or carrying on any commercial activity by doing business in Brazil. However, a lessor must obtain the CNPJ, as explained above.

There are statutory obligations on the lessor under Brazilian law, such as:

  • delivering the aircraft at the agreed time in the agreed condition, with all documentation for flight operations;
  • maintaining the aircraft, unless the lease expressly provides otherwise; and
  • guaranteeing the lessee’s quiet enjoyment of the aircraft during the lease term.

Lessees also have statutory obligations, such as paying rent on a timely basis, to the contractually negotiated location,  caring for the aircraft as it would its own property and redelivering the aircraft at the end of the term in the same condition as when delivered, fair wear and tear excepted.

In addition, for finance leases the following must also be added:

  • a description of the aircraft and its value;
  • the term of the lease, amount of each periodic payment (or criteria for the determination of such payments), due dates and location for payments;
  • the purchase option or contract renewal clause, at the lessee’s option; and
  • an indication where the aircraft is to be registered during the lease term (which must be in Brazil for leases to Brazilian operators). 

Tax and withholding gross-up provisions are permissible and enforceable in Brazil.

Other types of terms contained in many leases are void and unenforceable in Brazil, such as self-help remedies. Provisions deemed to be unilateral arbitrary options are also void under Brazilian law. In addition, any provision of a lease deemed to be a violation of Brazilian sovereignty, public order or good customs would also be invalid.

The lease may cover parts that are installed or replaced on an aircraft or engine after its execution. It is recommendable to have any installation or swaps formalised in a lease amendment, and to have such amendment registered at the RAB.

Although engines are not, per se, registered with the RAB, the RAB may register bills of sale, engine lease agreements and other related agreements, such as engine mortgages. A spare engine does not have a separate registration mark or number, and does not need to be deregistered. In order to avoid problems with documenting ownership of engines, it is recommendable to submit bills of sale to RAB registration regardless.

The concept of a trust does not exist in Brazil and in the past there was considerable confusion – both with the RAB and with courts – concerning the true nature of trusts as mostly the individuality of trusts was not always immediately recognised.  However, some years ago the RAB began to require the submission of copies of trust agreements in order to register title over the aircraft. The RAB does not make these public, and does not include the contents of trust agreements in title and lien certificates. Trust agreements are submitted for a purpose that is akin to KYC procedures at banks. The RAB's management decided that they should have some record of who is behind each trust owning an aircraft registered with the RAB. 

The interests of both the legal owner (not a beneficial one) and a lessor may be noted on the RAB. One of the expected legal effects of registration with the RAB is to constitute in rem rights and to allow the owner’s or the lessor’s rights to be enforceable and recognised by Brazilian courts. Another legal effect is to provide priority against a subsequently registered interest. Lastly, the registration also gives publicity to the document. 

The RAB is an “Owner Register” and the aircraft will always be registered in the name of the owner regardless.

The RAB is the specific register for leases.

Until recently it was also advisable to register documents such as lease agreements with a RTD. However, the registration with the RAB should be enough for documents such as lease agreements to be effective and enforceable in Brazil and against third parties. Unlike the RAB, which is exclusive for the registration of aircraft documents, there are many RTDs in Brazil and they serve for all kinds of general documents.

This means that the RAB offers publicity to a greater extent than RTDs. In addition, the registration requirements of the RAB are far stricter compared to the requirements of the RTDs. Therefore, upon registration of documents such as lease agreements with the RAB, each and all of them will be valid, effective, admissible in Brazilian Courts and enforceable against third parties.

The lease registration is a regulatory mandatory requirement, and the operator will only become the aircraft operator after the lease registration with the RAB. Leases must also be registered at the RAB for admissibility in court and enforcement purposes. On the other hand, leases are not subject to any consent from a governmental entity.

The following general rules apply to all documents to be registered in the RAB, including leases:

  • all documents and signatures must be notarised by a local notary. If signed abroad, the signature must be notarised and consularised at the Brazilian Consulate or, as applicable, apostilled (Brazil is a signatory of the Hague Convention);
  • documents that are not executed in Portuguese must be translated by a local sworn translator and then registered with the RAB, accompanied by the official translation into Portuguese;
  • documents must be executed by two witnesses for submission to the RAB in order to become enforceable in Brazilian courts; and
  • if the documents are signed in Brazil by attorneys-in-fact, the power-of-attorney must also be notarised and notarised or apostilled (as applicable).

For the estimated period please refer to 1.2 Transfer of Ownership, above.

Other than the formalities above, no other government applications or consents are required as a pre-requisite to the execution and delivery of an aircraft and/or engine lease.

Please see above.

Filing fees apply at BRL8.49 per page of a lease, plus fees for a new Certificate of Registration and Certificate of Airworthiness, at BRL76.40 and BRL76.55 respectively.

Aircraft operated in Brazil must be registered solely in Brazil.

Please see above.

If the lessor is not Brazilian, it will not be liable for the collection of Brazilian taxes. If a lessee does not withhold, this legal obligation towards the authorities will be held exclusively by the lessee.

Generally, lessors are not subject to withholdings on lease payments. However, if the lessor is based in a jurisdiction that is blacklisted as a tax haven by the Brazilian authorities, the lease payment will be subject to the withholding of income tax.

Lease payments made to lessors incorporated in such jurisdictions are subject to Brazilian income tax withheld at source, at the rate of 25% of the amount of the payment. Currently, Ireland is listed as a tax haven country, although there are specific exemptions for airline lease payments to be made to Irish lessors with no withholding obligations.

Non-scheduled payments to any lessors (eg, default interest) would have to withhold income tax at the rate of 15%.

A foreign lessor could not be deemed to be resident, domiciled, carrying on business or subject to any taxes as a result of its being a party to or its enforcement of a lease. Please see 2.1 Overview, above.

Provided the lease is registered with the RAB and the lessor does not have any active participation in the operation, maintenance or insurance of a leased aircraft, Brazilian law does not impose any liabilities on a lessor arising from the lease.

Article 124 of the Brazilian Aeronautical Code (the "Code") provides that the owner/lessor is not liable for damages caused by an aircraft when an operator is registered with the RAB. Challenges have been lodged against other liability provisions of the Code so there is a risk that such a challenge could be lodged against Article 124. Many such challenges rely on the general provisions of the Brazilian Civil Code.

The Code provides that the registered operator is exclusively liable for damages caused by an aircraft. Article 124 of the Code establishes that owners are not liable for the aircraft damages if the lease is registered with the RAB and the operator is expressly indicated. If the lease is signed but not registered, then there is a joint responsibility. Therefore, there should be no risk under Brazilian law, as long as the lease is registered with the RAB, and provided the lessor/owner does not have any active participation in the operation, maintenance or insurance of a leased aircraft.

The creditors of a domestic lessee would have no right to attach a leased aircraft, since such lessee does not own the aircraft.

Generally, there are no third party rights that take priority over a lessor’s rights under an aircraft or engine lease, although there might be some controversies. For Brazilian-registered commercial aircraft, the Brazilian National Airport Authority (known as “Infraero”) has tried to impose liens on aircraft due to the non-payment of airport fees by airline lessees – mostly unsuccessfully. In addition, there have been some cases where the Brazilian tax authority (“SRF”) has sought to confiscate Brazilian-registered aircraft due to violations by domestic lessees of customs and import regulations. In such cases, the SRF has not offered compensation to the owners/lessors.

Brazilian airlines must purchase primary insurance from Brazilian insurance companies.

Regardless of its operation or use, every aircraft must have compulsory civil liability insurance, called RETA, corresponding to its registration category. However, as it is obligatory, this insurance grants coverage based on values previously defined according to the Code.

Brazilian primary insurance companies may purchase at least 40% of the risk from reinsurance companies registered in Brazil.

Cut-through clauses are enforceable in Brazil only if the primary insurer is insolvent. Express cut-through clauses are necessary, but are subject to this limitation.

Assignments of insurance/reinsurances are permitted. There are no constraints upon the form of such assignments.

There are no restrictions on the ability of the lessor to:

  • terminate the leasing of the aircraft following an event of default, provided legal process is properly handled, including the service of notice of termination under the Brazilian civil procedure requirements;
  • re-export the aircraft, although without the co-operation of the lessee the lessor will need a court order authorising the export; or
  • sell the aircraft upon termination of the leasing of the aircraft.

The aircraft does not need to be in Brazil for these actions to be taken.

A lessor can take physical possession when enforcing the lease, provided there is a court order allowing the hostile repossession of the aircraft.

State Courts are competent for all legal actions relating to aviation disputes involving a lessor and lessee. The State Court in the State where the lessee keeps its head office will have jurisdiction over the case. Administrative proceedings are handled by the Brazilian National Civil Aviation Agency (“ANAC”), the agency to which the RAB is subordinated.

If the lessee is in default under the lease, the lessor may seek a preliminary injunction to repossess the aircraft/engine under an order from a Brazilian Court, but those orders are not equivalent to a summary judgment. In aircraft repossession cases filed against airlines that were not undergoing judicial reorganisation procedures, the Brazilian courts have been efficient in granting such preliminary injunctions. The lessor can obtain preliminary possession in a matter of a few days.

Domestic courts will not uphold a foreign law as the governing law of an aircraft lease, but will uphold the submission to a foreign jurisdiction if the applicable provisions of such foreign law do not violate Brazilian public order, good morals and sovereignty, and if the relevant transaction document has been properly filed according to the filing requirements. The parties are not entitled to immunity.

Judgments obtained by a foreign court or an arbitral award can be enforced. Foreign judgments become valid in Brazil after ratification by the Superior Court of Justice, which will not re-examine the merits of the case, but will observe if the foreign judgment:

  • was given by a competent foreign court;
  • was effective in the jurisdiction where it was rendered;
  • is duly accompanied by an official translation into Portuguese;
  • observes res judicata; and
  • is not contrary to public policy in Brazil. 

Urgent requests may be considered by the Superior Court of Justice prior to the end of the exequatur.

A Brazilian court can grant an order against a Brazilian lessee that is expressed in a foreign currency; however, if the payable settlement is to be made in Brazil, then it will need to be converted into Brazilian reais.

There are no restrictions under Brazilian law regarding a lessor’s ability to recover default interest (or the compounding thereof) or to charge additional rent following termination of the lease for default, including where the lessee fails to return the aircraft. 

Non-Brazilian plaintiffs must file a bond in court that is set by the Judge, usually between 10% and 20% of the value of the cause of action, to cover the opposing counsel’s fees, in case the foreign lessor loses the action (certain countries, including the Netherlands, are exempted from posting the court bond). All plaintiffs also must pay the court filing fees at 1% or 2% (depending on the State Court) of the value of the action, but limited to an amount of approximately USD20,000. If a lessor’s claims prevails, the lessee must reimburse the court fees paid on filing.

A lessor must comply with mandatory notice periods if it terminates an aircraft lease (regardless of its terms) that relates to an aircraft that is operated domestically or leased by a domestic operator.

At present, no Brazilian airline is entitled to immunity on grounds of sovereignty.

Brazil has ratified the 1958 New York Convention. Enforcement of arbitral awards is recognised, and follows the same procedure as the enforcement of a foreign court decision, as detailed above.

The concepts of contractual assignment and novation are recognised in Brazil.

In order to be admissible in a Brazilian Court, the assignment/novation must be registered with the RAB (see 2.3 Lease Registration). Lessee consent is not required, but a signature should be required if the lease is amended.

It is advisable for an aircraft and/or engine lease assignment and assumption/novation to be translated, certified, notarised or legalised, in order to be enforceable against a domestic party; please see 2.3 Lease Registration, above.

Please see 2.3 Lease Registration, above. The aircraft novation/assumption and/or lease assignment needs to be filed with the RAB. Failure to do so would lead to the ineffectiveness of the novation/assignment for all regulatory and third-party purposes, although the parties' obligations continue to bind them.

The fee for registrations at the RAB is currently BRL8.49 per page. It should be noted that any document written in any language other than Portuguese must be translated into Portuguese by a public sworn translator. In such cases, the RAB will register both the original and the Portuguese translation, but the costs will be calculated based on the number of pages of the sworn translation into Portuguese.

If the owner is also the operator direct lessor, certain governmental approvals that are also required for the original lease registrations will be required for the aircraft novation/assignment (ie, Central Bank ROF, registration with the RAB and customs documents). If the owner is not the lessor, then the registration of the bill of sale and an owner consent to the sublease will suffice. The change of owner participant does not require registration, other than a lease amendment and other security/ancillary documents correcting the references.

Brazilian legislation provides that aircraft deregistration can be applied:

  • at the request of the owner or the operator, with  the express written consent of any lienholders;
  • ex officio, if the aircraft has been registered in another country; or
  • in the case of abandonment or if the aircraft is a total loss.

The application is made before the RAB and needs to be accompanied by required documents, such as:

  • the lease termination;
  • lien releases (when applicable);
  • the export documents – export request (RE) and export clearance (DE);
  • the export certificate of airworthiness, or a formal waiver from the new registry; and
  • the ANAC certificate confirming that the aircraft does not owe any fines.

The lessee's or operator's consent is not required to apply for the deregistration of the aircraft, but their co-operation is essential for amicable returns (normally the lessee is entitled to obtain the documents required to deregister an aircraft).

A mortgage release is also required by the RAB to release liens prior to deregistration or to confirm that the lien should continue once the aircraft is registered somewhere else after the deregistration is completed by the RAB. Since aircraft mortgages in Brazil must be governed by Brazilian law, while (generally) a New York law mortgage is also in place, in practice the Brazilian mortgage is released on deregistration, as it has no effect in other jurisdictions.

If an IDERA is enforced by an authorised party applying for deregistration of an aircraft, then there is no need to present any of the documents indicated in Deregistering Aircraft in this Jurisdiction.

Please refer to Deregistering Aircraft in this Jurisdiction.

Under its rules, the RAB may take up to 30 days to process any formal request; however, the RAB usually takes between five and 15 days, after all documents have been properly submitted.

The aviation authority does not provide advance assurances to an aircraft owner, mortgagee or lessor as to the prompt deregistration of an aircraft.

The deregistration application incurs a fee of BRL77.30 (“cancelamento de matrícula”), and BRL77.15 must be sent to the new registry (“informação de desregistro e não registro”) for the deregistration confirmation.

The deregistration power of attorney will be recognised, and the formalities required for its validity are that all documents and signatures must be notarised by a local notary; if signed abroad, the signature must be notarised and consularised at the Brazilian Consulate or, as applicable, apostilled. Brazilian legislation also provides that “foreign documents” must be registered with the RTD in order to become effective in Brazil, as explained above.

No additional documents are required; however, to enforce deregistration power of attorney, the documents that are not executed in Portuguese must be translated by a local sworn translator and then registered with the Aircraft Register, accompanied by the official translation into Portuguese. The documents must also be executed by two witnesses for submission to the RAB and in order to become enforceable in Brazilian courts.

A deregistration power of attorney does not have to be governed by Brazilian law in order to be effective, as long as the power of attorney does not violate Brazilian sovereignty, good customs or public morality.

If a deregistration power of attorney is expressed to be irrevocable, the grantor is able to revoke it anyway, in practice, but doing so requires a court decision. A court order is necessary to declare the transaction’s nullity, invalidity or ineffectiveness.

Aircraft owners, mortgagees or lessors do not have the authority to export an aircraft without the co-operation of the lessee or a court order. The export request is made through a system named SISCOMEX, to which only the lessee, as the Brazilian importer, has access; in such capacity, only the lessee can register the export.

In hostile repossessions, the court has the authority to determine the export of the aircraft, forcing the customs authorities to process the export documentation.

Although the IDERAs are expected to allow the authorised party to request export of the aircraft, this does not happen in Brazil. The ANAC and the Customs Authorities do not communicate, and there are no precedents of an IDERA being accepted to confirm one export.

During the negotiations, however, mortgagees, owners and lessors should make sure they are appointed as an authorised party under the terms of the IDERA. Provided the relevant airline is not undergoing judicial reorganisation, the IDERAs are effective to procure the aircraft deregistration, but currently not the export. Although unlikely, if this changes in the future, the IDERA could become a more powerful instrument and allow the export of aircraft.

The asset does not need to be located in Brazil at the time of deregistration and/or export, which means that no export document is necessary to remove the aircraft from Brazil.

An export registration (RE) and an export confirmation (DE) are required, but they cannot be issued in advance. The export registration must be obtained by the importer of records at the time of exportation, so it is usually obtained by the Brazilian lessee, since it is the Brazilian lessee that is the importer. The lessee's prior consent and authorisation through the issuance of an IDERA and a deregistration power of attorney can be helpful to expedite the process at the time of deregistration; however, if the lessee is objecting to the export for any reason, then a court order would be required before the authorities would allow the export. Provided there is co-operation from the lessee, the registration of the RE is immediate and made in the SISCOMEX system, while the DE is a confirmation from the customs authorities and is only issued with the physical export of the asset, so the term will depend on the actual export.

No significant costs, fees or taxes are charged in respect of the export of an aircraft, provided there are no penalties arising from the import regime that may prevent the aircraft being exported prior to settling eventual fines. Such penalties would be imposed against the operator and not on the asset, so, in general, there are no fees other than the RAB fees.

There is no need for such type of confirmation, but the deregistration might take longer when there is no co-operation from the lessee. Since 2014, the RAB has been accepting the enforcement of IDERAs and proceeding aircraft deregistration within the five-day term. However, as self-help remedies are not available, a repossession judicial order will need to be granted by a Brazilian court if the lessor does not have possession of the aircraft.

The occurrence of a liquidation should not affect the IDERA previously granted. Generally, the RAB processes a deregistration application based on IDERAs; however, in a very recent case – the court-supervised reorganisation (recuperação judicial) of Oceanair Linhas Aéreas S/A (a.k.a. Avianca Brasil) – the 1st Bankruptcy Court of the City of São Paulo granted a stay in favour of the debtor against any enforcement action from lessors of aircraft and parts for a period that exceeded 100 days. Such stay period in respect of leases of aircraft and parts was granted by the court despite not being allowed by the relevant provisions of Law 11.101/2005 (the Brazilian Bankruptcy Law) or the Brazilian Presidential Declarations under the Cape Town Convention. During the stay period, the RAB was expressly prohibited from processing deregistration applications based on the IDERAs. So, there are court precedents indicating that IDERAs cannot be enforced during a stay granted in a reorganisation proceeding (even though the legislation may indicate otherwise).

If the lessee is subject to a bankruptcy liquidation proceeding (falência), the RAB shall be able to process deregistration application based on IDERAs, regardless of any stay granted by the court.

If a lessee has possession of the aircraft and is put into liquidation, administration or a similar process, the lease will not be set aside. Under Brazilian law, the lease is not subject to reorganisation or liquidation proceedings, and can be enforced in a civil court.

The lessor should not be prevented from repossessing the aircraft in either reorganisations or liquidations. In a reorganisation, although legislation provides that the lessors shall have the right to immediately repossess the aircraft and parts, the court may grant a stay in favour of the lessee, according to court precedents. In a liquidation proceeding, the lessor shall be allowed to repossess the aircraft and parts at any time.

The aircraft under a financial or operating lease will not be deemed as the lessee's property. However, depending on the terms of a finance lease, if the lessee has already satisfied a very significant portion of the aircraft purchase price, a court may recognise substantial completion of the finance obligations and determine the remaining outstanding amount to be paid while the lessee remains in possession of the aircraft (even though there is no significant precedent that would support this).

If a borrower is subject to a bankruptcy liquidation proceeding, all claims held by the lender will be paid with the proceeds deriving from the sale of the assets, which will be distributed to creditors according to the priority rule set forth in the Brazilian Bankruptcy Law (post-commencement claims having priority over pre-commencement claims). If the borrower is subject to a reorganisation proceeding, all pre-filing claims (with exceptions) are impaired by a plan of reorganisation (which becomes binding on all affected pre-filing creditors after it is submitted to approval by the required majorities at a creditors’ meeting and to court confirmation). If the claim derives from a lease agreement of aircraft or parts, it is not subject to either a bankruptcy liquidation or a reorganisation proceeding, and can be enforced by the relevant creditor pursuant to the applicable provisions of the Brazilian Bankruptcy Law.

If the borrower becomes insolvent, the lender can still pursue satisfaction of its claims against the guarantors. In principle, a plan of reorganisation cannot create releases in favour of third-party guarantors, although this matter is subject to heavy litigation and there are recent court precedents allowing guarantors to be discharged by a plan (even if the relevant creditor disagrees with such provision).

If the guarantor becomes insolvent, then the lender may request the borrower to replace it, depending on the terms of the agreement. The same provisions that apply to a bankruptcy liquidation proceeding and a reorganisation proceeding of a borrower also apply to a guarantor. In any case, the lender will have the right to fully enforce its claim against the borrower if the guarantor becomes insolvent.

If a provider of a security interest becomes insolvent, the rights of the lender will depend on the security interest that was provided. In the case of a mortgage (hipoteca) or a pledge (penhor), the claim held by the lender will be subject to the liquidation or reorganisation proceeding (as the case may be) of the provider of such security, and will be allocated as a holder of a secured claim (up to the value of the collateral) for purposes of voting at a creditors’ meeting and receiving any distribution. In the case of a chattel mortgage (alienação fiduciária em garantia) or a fiduciary assignment (cessão fiduciária em garantia), the claim held by the lender will not be subject to the reorganisation proceeding and will be entitled to separate satisfaction (up to the value of the collateral). However, the lender cannot remove the assets which are necessary for the operation of the business activities of a debtor under judicial reorganisation while the stay is in course.

In a reorganisation proceeding, the court orders a stay of 180 days following commencement of the case, which is usually extended until the date the plan is confirmed by the court. In a bankruptcy liquidation, the stay remains in force and effective until all assets are distributed to the creditors.

However, some claims are not affected by the stay and can be satisfied by the relevant creditor, such as the claims held by lessors of aircraft and engines.

A lessee can file a voluntary case for bankruptcy liquidation, court-supervised reorganisation, or expedited reorganisation (recuperação extrajudicial). In all these cases, the court will accept the filing if the debtor submits the required documentation. No insolvency test is required.

Any creditor holding a claim of over 40 minimum wages (roughly USD10,000), the underlying documentation for which fulfils the requirements of an enforcement title under Brazilian law, can file for involuntary bankruptcy liquidation of a debtor. A creditor cannot file for the court-supervised reorganisation or expedited reorganisation of a debtor.

Ipso facto clauses are usually considered null and void by the court. In a reorganisation proceeding, the agreements remain in full force and effect, and the court usually allows the debtor to keep operating regardless of any ipso facto clause, unless there is the default of a post-filing obligation. In a bankruptcy liquidation proceeding, the court-appointed judicial administrator has the power to assume or reject contracts. Such provisions shall be applied to the insolvency of lessees of aircraft and parts, although, due to the nature and significance of the activity, as recent precedents have shown, there is a possibility for the courts to stay the enforcement of certain provisions to facilitate the restructuring of the debtor.

The Brazilian Bankruptcy Law specifically provides, in article 199, that lease agreements of aircraft and engines are not affected by a reorganisation or a liquidation proceeding, and the rights over such assets and all contractual provisions shall prevail. Therefore, lessors shall be able to fully enforce the lease agreements and exercise all their rights under such agreements. However, there is a recent court precedent (in the Avianca Brazil case, as noted above) in which the court stayed the right of lessors to repossess the aircraft and engines despite the lessee being in default of claims under the lease agreements, which were due both before and after the debtor filed for reorganisation.

Brazil has ratified the Convention and the Protocol – collectively, the “CTC”. It is necessary to obtain “authorised entry point” and in Brazil the RAB acts as an Authorising Entry Point (AEP) and grants the AEP codes for international filings. Only Brazilian residents previously registered with the RAB can apply and obtain an AEP code. The codes issued cannot be used by third parties, so only Brazilian residents are allowed to perform international registry filing/discharges over Brazilian registered aircraft, and it usually takes two or three days to obtain them.

Brazil has made the following declarations in respect of the CTC, among others:

  • article 39, paragraph 1, items A and B, and paragraph 4, meaning that priority is given to the holder of a registered international interest;
  • pursuant to article 53, Brazilian courts will have jurisdiction for the purposes of article 1 and chapter XII of the Convention;
  • pursuant to article 54, paragraph 2, leave of Brazilian courts is required to exercise remedies under the CTC;
  • pursuant to article XXX (2) of the Protocol, article X will be applied in its entirety and, for the purposes of items A and C of article 13(1) of the Convention, relief will be granted in ten working days, or in 30 working days for purposes of items D and E of article 13;
  • pursuant to article XI of the Protocol, Brazil declared that it will apply Alternative A in relation to insolvency procedures, and that the stay period mentioned in paragraph 3 will be 30 working days;
  • IDERAs will be accepted pursuant to article XIII of the Protocol; and
  • pursuant to article XIX (1) of the Protocol, the RAB is designated to issue entry codes for the registration of international interests.

According to the requirements explained in Declarations Made Concerning Conventions, above, IDERAs will be accepted pursuant to article XIII of the Protocol. Also, IDERAs are accepted in Brazil and there is a precedent for their successful use to deregister aircraft in lease default situations (although it is necessary to obtain a court order to physically take an aircraft from a Brazilian operator), provided the airline in default is not undergoing judicial reorganisation and/or is not subject to court protection.

CTC has been successfully enforced, both before the ANAC when processing deregistration applications based on the IDERAs and before the Brazilian courts when repossessing aircraft, provided the lessee was not undergoing a judicial reorganisation.

On the other hand, during the judicial reorganisation of OceanAir Linhas Aéreas S/A – Avianca Brasil, the CTC was not fully enforced by the Court, seriously affecting the lessor’s rights under the CTC. While Brazil committed to a 30-day stay period, several aircraft and engine lessors were prevented from repossessing their assets for about 120 days. Multiple decisions from the São Paulo Court and the Superior Court of Justice impeded the continuance of repossession processes, and considered the lessee's activity to be of greater social impact, allowing it to keep the aircraft and engines for a longer term.

Ultimately, the Courts have confirmed the applicability of CTC, but created a questionable precedent in terms of prevailing legislation of the stay period.

Brazil is a signatory to the Geneva Convention and was a signatory to the 1933 Rome Convention (Decree 3978 of 29 April 1939) until Brazil’s adherence to the Cape Town Convention revoked the Rome Convention.

There is no restriction on foreign lenders lending to a Brazilian borrower without being locally registered, licensed or otherwise authorised to operate in Brazil.

Regarding the inflow of funds into Brazil, the amounts, terms and conditions of the credit facility must be registered with the SISBACEN through the ROF. Additionally, in order to provide such registration with the SISBACEN, a foreign lender must be enrolled with the CNPJ, which does not entail any obligation to pay taxes in Brazil on its overall income, and with the Central Bank of Brazil’s Companies Database (CADEMP). When applying for a CNPJ, the foreign entity must also present evidence of the Ultimate Beneficial Owner (UBO) in its organisation.

Payments to foreign lessors/owners or mortgagees by companies such as airlines are subject to strict foreign exchange controls. A foreign lender can only transfer the relevant funds to the Brazilian borrower after said foreign lender and the loan transaction have been duly registered with SISBACEN.

Borrowers are permitted to grant security to foreign lenders.

Downstream, upstream and/or cross-stream guarantees are permitted in favour of lenders.

If share security is available as additional security for the asset, then it might be advisable for a lender to take share security over a domestic special purpose vehicle that owns the financed aircraft. The pledge of shares to secure a loan is recognised, subject to proper form and registration.

A negative pledge is recognised and, as an obligation, can lead to the acceleration or early termination of an agreement.

Intercreditor arrangements are authorised and will be subject to the regular restrictions on the transaction under Brazilian law, including the governing law of certain documents, so they need to be analysed on a case-by-case basis.

The concept of agency and the role of an agent (such as the facility agent) under a syndicated loan are recognised, and the agent representation will be regulated by the private agreement.

The transfer or assignment of all or part of an outstanding debt under an English or New York law governed loan is permissible and recognised, although transactions need to be analysed on a case-by-case basis to assure the assignment is properly construed in a way to remain enforceable in Brazil.

There is a usury rate of 12% per annum established in Brazilian law as a rule, but this is not usually applied to recover payments in aircraft finance. This position has not been fully settled in Brazil and may be confirmed on a case-by-case basis upon review of the relevant documents.

The typical securities are the mortgage and the fiduciary assignment. In respect of the mortgage, Brazilian legislation recognises only the security and the enforcement of mortgages governed by Brazilian law and registered with the RAB. Brazilian mortgages do not grant repossession rights, so they should be accompanied by a lease security assignment to assure the creditor’s repossession rights.

The fiduciary assignment is similar to a chattel mortgage but can only be granted when the borrower is the aircraft operator. Where the finance structure is a cross-border arrangement with a sublease structure, this security is not possible.

Although Brazilian law establishes four types of security to be used in Brazil (mortgage, pledge, antichresis and “fiduciary assignment”), in general there are no types of security that cannot be taken over an aircraft or related collateral.

Please see Recognition of the concepts of Trust/Trustee, above. The RAB recognises the role of a security trustee or owner trustees. In Brazil it is doubtful that the concept of a trust would be recognised – a trustee would probably be treated as an agent holding interests for third parties, but this issue is not entirely clear. Both owner trustees and security trustees are common in Brazil.

A borrower can assign its rights to the aircraft or under an aircraft lease (including in relation to insurances) to a security trustee, pursuant to a security assignment or a mortgage.

An assignment of rights does not necessarily require an assignment of obligations.

A security assignment or a guarantee can be governed by English or New York law, as long as it does not violate Brazilian sovereignty, good customs or public morality; also, security assignments are rarely governed by Brazilian law.

A security assignment, and any lessee consent to a security assignment, should be registered with the RAB. Brazilian law does not impose any constraints upon the form of such assignment, though it must be executed by two witnesses and translated into Portuguese by a public sworn translator if it is written and signed in another language. In order to register with the RAB any notice of assignment given to the lessee and any acknowledgement of assignment given by the lessee to the security trustee, the RAB requires registration of the security assignment as well. The lessee's prior, written acknowledgment to the assignment is required by the Brazilian Civil Code and is mandatory to validate the assignment against the lessee.

Brazilian law does not impose any constraints upon the form of such assignment, though it must be executed by two witnesses and locally filed with the RAB. Cape Town filings are also required, and are made with the International Registry after the AEP code is obtained. In order to bind the lessee to the assignment, a written and prior acknowledgement from it is necessary.

The security assignment can be governed by English or New York law, and would not need to be in a particular form in order to be registered in Brazil. However, as indicated above, there are general rules that apply to all documents to be registered in Brazil and these need to be complied with.

In such cases, a new notice and acknowledgement would need to be signed by the lessor and acknowledged by the lessee and the new secured party, and registered with the RAB.

A change in the security trustee would require registration of an amendment to the security assignment. Such amendment would have to be registered with the RAB; the security interests would not be jeopardised.

“Parallel debt” structures in the form of Brazilian mortgages combined with a security assignment are used domestically so that the security trustee has an independent right to the secured debt.

A secured party under a security assignment would not be deemed to be resident, domiciled, carrying on business or subject to any taxes as a result of its being a party to or its enforcement of such security assignment.

A domestic law mortgage over an aircraft or engine would be perfected with its registration before the RAB.

Please see Risk of Title Annexation, above. Engines are not, per se, registered with the RAB. The RAB registers engine lease and security agreements and other related documents. A spare engine does not have a separate registration mark or number and does not need to be “deregistered”. Engines can now be registered with the International Register, under the CTC.

An escrow account providing the mechanism to satisfy a lessor/lender/creditor in respect of lease/sublease receivables can be arranged. The perfection of the mechanisms needs to take the registration with the Central Bank and the SISBACEN requirements into consideration.

Generally, a third party cannot take or register a lien over an aircraft. Airport taxes, navigation charges, customs duties, repairers' costs, and crew salaries are all considered in personam.

Repairers do not have the right to impose any lien on the asset as a result of the lessee's failure to pay for the maintenance; however, they might hold possession of the asset and impose a detention right until the work done on such asset is paid. Such right, if applicable, is based on the maintenance service agreement, which is a contractual right in favour or the repairer and should not be subject to constraints, unless there is a proper agreement to create a lien against other assets in debt.

As long as the lessee is not the asset owner, the fleet lien is not recognised.

These third parties will have to procure the enforcement of their rights under the maintenance/service agreement supporting each debt. Under Brazilian law, a debtor cannot create a lien based on third party assets unless doing so is expressly acknowledged in anticipation by the affected third party. Certain creditors, such as repairers and airports, may impose operational constraints that should force the lessee to solve the debt, such as holding the repaired part or preventing the aircraft from departure in case of debts. Other guarantees can be given, and security created to protect those agreements, but these will be perfected and effective on a case-by-case basis.

As previously mentioned, the RAB may take up to 30 days to process any formal request and discharge a lien or mortgage over an aircraft once all the requirements have been met.

Aircraft mortgages must be registered with the RAB. Under the terms of the CTC, the mortgage also creates an International Interest that must be filed when local filing is made with the RAB. The mortgagee or security trustee interest must be noted in the RAB.

Statutory rights of detention or non-consensual preferential liens cannot arise over an aircraft and/or on a “fleet-wide” basis, although certain repairers, airports and other potential creditors may attempt such practice.

The potential buyer must obtain and a analyse the RAB ownership and lien certificate, the ANAC certificate known as “Nada Consta”, also issued by the RAB, and a priority search certificate, issued by the International Registry.

The security assignment, the loan and the guarantee must be construed as an enforceable instrument (according to the Brazilian law).

If security is granted to a security trustee by a lessor in respect of its rights under an aircraft lease, in theory that security trustee can enforce its rights under the security assignment pursuant only to a notice and acknowledgement executed by that lessor and the relevant lessee respectively in connection with such security assignment, and in the past only the notice and acknowledgement would be taken to registration in Brazil. However, to assure all parties' rights, it is reasonable to expect that the court will demand the security assignment to be filed. Currently, the RAB also requires the security assignment to be filed in order to record the notice and acknowledgment. A short form of the security assignment can be used.

Domestic courts will uphold a foreign law as the governing law of a finance or security document, and the submission to a foreign jurisdiction, although aircraft mortgages must be governed by Brazilian law and recorded with the RAB in order to become effective over a Brazilian registered aircraft.

Please see 2.6 Lease Enforcement, above.

The lessor can take physical possession when enforcing the lease, which grants repossession rights. The Brazilian law mortgage, which is typically used to secure lenders' rights, does not grant repossession rights, so it must be given with a lease/security assignment so that the security trustee can enforce rights under the lease. In an un-remedied event of default, the lessor/security trustee can procure repossession without the lessee’s or operator’s consent. However, it is necessary to have a court order to repossess an aircraft in Brazil. The judicial procedure is through a preliminary injunction request.

Civil courts under State Courts organisation are competent to decide enforcement actions under a security agreement/aircraft mortgage.

Firstly, please note that the mortgagee’s rights would be repaid through the proceeds of sale, even though a mortgage constitutes a right in rem over a mortgaged aircraft. This means that a foreclosure sale would be affected by an auction of the aircraft after the issuance of a judgment in a foreclosure action.

Once the aircraft has been detained under a court order, the mortgagee may opt for one of the following:

  • to take title to the aircraft (in which case, the mortgagee must accept the value of the aircraft as officially appraised and pay the mortgagor if that value exceeds the secured obligation);
  • to procure a private sale if approved by the court; or
  • to wait for the judicial auction of the aircraft.

For the second and third alternatives, the mortgagee would be paid with the proceeds of the sale.

In cases of foreclosure, the mortgagee is not required to provide any bond, bank guarantee or cash deposit, but please note that aircraft mortgage foreclosure sales are uncommon in Brazil due to the number of uncertainties surrounding the timing and remittance of the sale proceeds (it is impossible to estimate how long it could take to enforce a mortgage as this differs from court to court).

The mortgage is extremely relevant to grant priority and secure the mortgage credit in an eventual bankruptcy or liquidation procedure. Unlike in other jurisdictions, a Brazilian law mortgage does not grant repossession rights.

In addition, please bear in mind that secured parties usually exercise rights through lease assignments (with corresponding notices of assignment and acknowledgements of assignment) – thus, acting in the place of the lessor. Mortgagees are highly recommended to seek possession as assignees of lessors.

Please see 2.6 Lease Enforcement, above.

The secured parties will not be subject to taxes (other than capital gain taxes if applicable). However, there are costs directly related to a judicial dispute, which vary from court to court, as these are State organisations. If a judicial dispute to enforce a credit protected by a mortgage is filed, it is reasonable to estimate court fees of approximately USD20,000 (BRL75,000). If the plaintiff is a foreign party, the Court can order the deposit of a court bond of up to 20% (a 10% bond should generally be expected). This also depends on the foreign party's main office location, as Brazil has bilateral agreements with certain countries that can waive this bond requirement.

As mentioned above, the judicial reorganisation of Avianca Brasil is undergoing, and is the first airline insolvency procedure testing CTC in Brazil. Although the court has confirmed the application of CTC, the total period of stay applied by the court, under the argument that consumer and system protection was needed, was more than 110 days, which is much higher than the 30 days committed under the Brazilian Presidential Declaration under Alternative A of the CTC. These are not binding precedents.

The Brazilian Congress (Câmara dos Deputados) voted the PL 2724/15 on March 20th, 2019, which amends the Brazilian Aeronautical Code to lift the 20% limitation to foreigners holding voting shares of Brazilian air service companies. The PL 2724/15 allows foreign investors to hold up to 100% of the voting shares, although prior approval from the CADE (Antitrust authority), the Ministry of Defence and the Aviation Authority ("ANAC") will be required beyond 49%. The bill still needs to be approved by the Brazilian Senate, before being enacted by the Presidency.

This development is in line with other projects that are moving in the same direction, such as the Provisional Measure 863 (“MP 863”) enacted in December 2018. The MP 863 still needs to be confirmed by the Brazilian Congress and converted into Federal Law to become permanent. The MP 863 is effective until March 27th and can be extended until May 26th. Congress has not yet indicated when the voting will happen, so some of the answers above may change over time.

Veirano Advogados

Av. Brigadeiro Faria Lima, 3477
16º andar
04538-133 São Paulo SP
Brasil

+55 11 2313-5911

+55 21 3289 0924

joao.servera@veirano.com.br www.veirano.com.br

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Veirano Advogados is a full-service, independent law firm offering legal services in all areas of corporate law. It combines legal expertise, commercial vision and commitment to navigate the most complex transactions and challenges, assisting clients ranging from startups to global companies, and from disruptive technologies to heavy industries. The lawyers’ multidisciplinary background and broad experience enable the firm to approach each problem from every relevant angle and to design strategic solutions for the most complex challenges, when and where they arise.

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