Unregistered aircraft during lease delivery period
New requirements for export certificate of airworthiness

The National Civil Aviation Agency (ANAC) has recently made two changes in its practices that are causing uncertainty and difficulty in some aircraft lease deliveries and redeliveries. As in the past, changes in ANAC practices are subject to review and may be reversed, especially if airlines and other operators raise any problems relating to the new practices. Occasionally, ANAC alters its policies without realising the full consequences a change might cause.

Unregistered aircraft during lease delivery period

The first change relates to aircraft being delivered on lease to Brazilian operators when the delivery location is in Brazil. The policy change, which relates to ANAC inspections, virtually assures a 'gap' period of several days between the moment of deregistration from the foreign register and registration in Brazil. When an aircraft on a foreign register is to be leased to a Brazilian operator, the operator must schedule an inspection with ANAC. ANAC does not authorise external inspectors to conduct inspections on its behalf - unlike the Federal Aviation Administration, which does so through designated airworthiness representatives and some European civil aviation authorities that delegate aircraft inspection authorisation to their national operators. ANAC inspections must be conducted by ANAC inspectors and the availability of such inspectors is limited and subject to request backlogs. ANAC inspectors used to conduct inspections outside Brazil from time to time. Such inspections are now quite rare and available in limited circumstances only.

At present, if an aircraft is ferried to Brazil on a foreign register, on arrival in Brazil the aircraft must be grounded and inspected by ANAC inspectors. Therefore, the first challenge to minimise the gap period is to synchronise arrival of the aircraft with the ANAC inspection, something that is not always possible. What exacerbates this procedure is that some ANAC inspectors will not inspect an aircraft that is still registered on a foreign register. In these cases the aircraft must be deregistered on the day that the ANAC inspection begins or even a day earlier. ANAC inspections of commercial aircraft take on average two to three business days to complete, so during this period the aircraft will not have a register. If there is a delay in commencing an inspection (if it straddles a weekend or if the ANAC inspector finds discrepancies), it may take longer than three business days.

As a result, aircraft are increasingly left without registration for periods of a week or more. The main consequences of this gap period are twofold. First, insurance may be affected. It is important that parties verify that insurance policies covering an aircraft undergoing ANAC inspection are not dependent on registration. In most cases insurance policies will cover aircraft during a gap period with no registration, but this should always be verified. Aircraft in inspection phases are grounded and therefore subject to reduced risks; however, even while on the ground such aircraft are subject to damage from mishandling, wind (which can cause loose ground equipment to collide with a parked aircraft) or damage from storms. In any event, insurance is a potential issue that is usually resolved by careful verification of the relevant insurance policies.

A second problem, which is more difficult to resolve, relates to security interests. According to the Geneva Convention, rights in rem over aircraft are governed by the law of their nationality. This principle is embodied in the Aeronautical Code. Nationality of an aircraft is conferred by an aircraft's registration. But if an aircraft has no registration it arguably has no nationality, which creates doubts concerning the proper governing law for security interests. It is arguable that the laws of the last jurisdiction of registration apply; however, this is not necessarily clear. If a borrower were to be declared bankrupt during a gap period between registrations, would its secured creditors be treated as having a valid security interest over a mortgaged aircraft? There is no clear answer to this question.

One way to resolve this with deliveries to Brazilian operators is to ferry aircraft to Brazil on the Brazilian register. There is a procedure for issuance of a special Brazilian ferry flight authorisation called an AEV (sometimes AEVI), which allows a Brazilian operator to ferry an aircraft to Brazil on the Brazilian register before ANAC inspection. Such aircraft, on arrival in Brazil, are grounded and inspected for a period similar to that described above. What differs in this procedure is that the aircraft, while being inspected by ANAC, has Brazilian registration.

An AEV is essentially a technical document and not a document reflecting ownership or security interests. It is sometimes thought that an aircraft with nothing more than an AEV is not yet registered on the Brazilian register of civil aircraft. This position is incorrect for a few reasons. First, an aircraft that is being ferried with an AEV is required to show and use Brazilian registration marks. Any previous foreign registration marks must be removed or covered. In addition, for an AEV to be valid, it must be accompanied by evidence of deregistration from the prior registry. Since an aircraft cannot have more than one registration at a time (and an AEV requires deregistration from the prior registry), the only logical conclusion is that an aircraft with an AEV is Brazilian registered, even though it has not yet been inspected by ANAC. The registration could be considered precarious and the aircraft could be removed from the register if it does not pass the ANAC inspection (something that has rarely, if ever, occurred). But with an AEV and deregistration from the last registry, an aircraft can be deemed registered. To create or preserve a security interest over such an aircraft, an aircraft mortgage can be filed with the Aeronautical Registry that, by its terms, takes effect as soon as the aircraft is given Brazilian registration marks. Ferrying an aircraft to Brazil on the Brazilian registry, pursuant to an AEV, is an effective way to avoid a gap period and maintain a security interest. On occasion, the alternative of an AEV is unavailable or inconvenient due to timing or other issues, but when available, it may be the preferred method of ferrying.

Cape Town filings cannot be used to minimise the security interest problem because Brazil has not yet approved the Cape Town treaty and International Registry filings are usually not made in respect of Brazilian-registered aircraft.

New requirements for export certificate of airworthiness

Applicable Brazilian regulations require the issuance of an export certificate of airworthiness as a prerequisite for deregistration. The requirement for such certificates, however, should follow the rules of the new register and not of the authority that is deregistering an aircraft. Although the requirement of an export certificate is the norm, several jurisdictions have exceptions that relieve parties of the requirement of presenting a certificate to register an aircraft. For example, the Federal Aviation Administration usually does not require a certificate to register an aircraft that was manufactured in the United States and has a US export certificate. Instead of an export certificate, some jurisdictions require a regular certificate of airworthiness issued within a stipulated period of time, such as six months. ANAC's rules used to contemplate these exceptions by allowing an exporting party to execute and deliver an undertaking to ANAC that an export certificate addressed to the civil aviation authority of the next jurisdiction of registration would not be necessary. Quite recently, however, ANAC has altered its practices and now requires the issuance of an export certificate of airworthiness in all cases, regardless of whether the next agency will require it. This change can complicate redelivery procedures as Brazilian operators must now schedule ANAC inspectors for all aircraft being deregistered.

For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3065 4455), fax (+55 11 3064 6049) or email ([email protected]).