Introduction

The Brazilian Aeronautical Code dates back to 1986. Since then, there have been numerous changes to industry practice in virtually all areas covered by the code – in particular, in relation to finance and operations. Further, the use of expressions which were common in the 1980s has also changed. While many of these changes have been the focus of new laws and regulations, the code has not been significantly revised in nearly 30 years. Although efforts to revise the code were made in 2001 and 2011, other congressional priorities delayed those initiatives.

The Senate is now undertaking a serious effort to revise and modernise the code. It has appointed a special committee comprised of experts to review the existing code, gather suggestions from the public and propose revisions. The special committee has received input from the public and industry associations (eg, a Brazilian airline association, a Brazilian air taxi association and an airport interest group). A new draft code is expected by the end of 2015. Although it is too early to know the special committee's final recommendations, it is possible to summarise some of the principal areas that are likely to change. This update discusses some of those areas, focusing on likely changes that are relevant to aircraft finance and airline ownership.

Key changes

Aircraft finance

In relation to aircraft finance, several articles in the code require and are receiving attention. First, the existing code was ratified before the Cape Town Convention was a reality. As the convention has been in effect in Brazil since the middle of 2013, the general revision of the code offers an opportunity to conform it to the convention.

International conventions in Brazil have the same standing as national law, which means that the convention and the code are on an equal footing. Thus, if the new code is inconsistent with the convention, the code – as the more recent law – will take precedence. The special committee is seeking to avoid this possibility.

IDERAs

Irrevocable de-registration and export authorisations (IDERAs) are a material feature of the Cape Town Aircraft Protocol (which is a part of the convention) and will likely be addressed in the new code.

In April 2014 the Civil Aviation Agency (ANAC) issued rules regulating the use of IDERAs. The regulations provide for deregistration by authorised parties within five business days, provided that all relevant conditions have been met (for further details please see "Cape Town Convention – first six months"). Although the convention and aircraft protocol have been enshrined in Brazilian law since 2013, the revised code should ensure consistency with ANAC's regulations in order to enhance the effectiveness and enforceability of IDERAs in Brazil. In addition, the code will impose further binding legal authority on Customs. Unlike ANAC, Customs has not issued specific regulations relating to the use of IDERAs.

Insolvency

Insolvency is another area of law which must be considered in the new code. The 1986 code included an article prohibiting Brazilian airlines from seeking bankruptcy protection. Although a bankruptcy procedure was in place, airlines were prohibited from using it. In June 2005 a new Bankruptcy Law came into force. The new Bankruptcy Law altered the code by allowing airlines to seek bankruptcy protection under a then-new procedure called judicial recuperation. Under this procedure, a debtor in judicial recuperation could – subject to the approval of its creditors – restructure debt it had accumulated before the judicial recuperation filing date. Since 2005 five Brazilian airlines have availed themselves of this procedure. Only one of them continues to operate (a regional airline called Passaredo).

Although the Bankruptcy Law allows Brazilian airlines to restructure under the judicial recuperation procedure, the law contains special provisions that apply solely to aircraft and aircraft engine leases. These provide that rights and claims under aircraft leases are not suspended by judicial recuperation. Thus, if an airline obtains judicial recuperation protection, it must continue to pay rent and meet its other obligations under its aircraft lease. If it fails to do so, the lessor may seek repossession under the terms of the lease and the judicial recuperation procedure cannot be used as a defence to slow repossession proceedings.

When Brazil approved the convention, it also approved insolvency provisions (known as Alternative A) contained in the aircraft protocol. Alternative A is similar to Section 1110 of the US Bankruptcy Code – in particular, in relation to possession of aircraft. The approach to possessory rights in Alternative A (and Section 1110) differs from that in the Bankruptcy Law. Under Alternative A, an airline seeking bankruptcy protection has a stay period during which it is protected from repossession claims. At the end of this period, the airline must comply with its lease obligations or return its leased aircraft. The Brazilian stay period under Alternative A is 30 days (the stay period in the United States is 60 days). Although the Bankruptcy Law contains no stay period, if a lessor needs to repossess its aircraft, it must seek repossession through the courts if the airline does not voluntarily return the aircraft. Alternative A imposes a positive obligation on the airline to return the aircraft after the stay period and another on the relevant jurisdiction to cooperate with deregistration and export (unless the airline complied with its lease obligations).

Some of the proposals that the special committee received earlier in 2015 sought to align the code with the Bankruptcy Law. However, these proposals must be revised to ensure that the code conforms to Alternative A – the more recent law relating to airline bankruptcy proceedings – in order to enshrine Alternative A in Brazilian legislation.

Other provisions in the Bankruptcy Law are expected to be included in the new code – in particular, those relating to claims that are consistent with the convention and aircraft protocol.

Definition of 'leasing agreement'

Since the convention came into force, a technical issue relating to an expression used in the Portuguese version of the convention has created doubts about the convention's applicability to leases. In the 1980s and earlier, the term 'mercantile lease' was used to refer to finance leases. Operating leases were referred to by a variety of terms, such as 'simple leases', 'operating leases', 'rental agreements' or simply 'leases'. The 1986 code contains separate articles relating to finance leases (called 'mercantile leases') and operating leases (called 'leases'). The legislation implementing the convention translated the convention's term 'leasing agreement' into Portuguese as 'mercantile lease agreement'. Use of the word 'mercantile' could be interpreted to restrict coverage to finance leases only. However, the definition of 'mercantile lease agreement' in the convention's implementing legislation expressly refers to leases "with and without purchase options", so the intention seems to have been to include both operating and finance leases. To date, ANAC has treated all types of lease as covered by the convention, so the issue is more technical than practical. However, this translation point has impeded Brazil's approval of export credit agency discounts. The new code is an excellent opportunity to clarify this issue and thus enable Brazil to qualify for export credit agency discounts, although other efforts are underway to qualify sooner.

Foreign ownership

Perhaps the most controversial aspect of the code that is likely to change relates to foreign ownership of Brazilian airlines. The 1986 code limits the percentage of voting shares that foreign investors can own to 20%. By issuing non-voting shares (which are limited to half of a company's total capital), foreign investors can reach a total equity position of 60%. However, the voting share restriction has impeded investment in Brazilian airlines.

In this regard, several proposals are pending before the special Senate committee. One such proposal seeks to eliminate all restrictions on foreign ownership of Brazilian airlines. Another seeks to increase the voting share limit to 49%. Although no one knows whether one of these proposals or a variation will eventually be approved, the general expectation is that the limits on foreign ownership of Brazilian airlines will be relaxed. During the past 12 months, at least two Brazilian airlines (Gol and Azul) have received equity injections, from Delta Airlines and United Airlines respectively. Less than two weeks ago, Azul announced a further investment from the HNA Group of China. Brazil's other major carriers (TAM and Avianca-Brazil) also have relationships with foreign affiliates which might change after the new rules on foreign ownership are approved.

Comment

The substantive revision of the Aeronautical Code is timely, considering that the existing code will have been in effect for nearly three decades. The new code is expected to conform to the Cape Town Convention and relax existing restrictions on foreign investment in Brazilian airlines. These are just a few areas of the code that are likely to change. The registration and use of unmanned flight vehicles (drones) and airport regulations are also expected to change or receive legislative attention for the first time.

For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599) or email (ken.basch@baschrameh.com.br). The Basch & Rameh website can be accessed at www.baschrameh.com.br.

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