Characteristics of financed aircraft
Problems arising in relation to export
Since the early 1990s repossession of leased aircraft in Brazil has been a relatively efficient process. Although lessor experiences have not been entirely consistent, and some notable exceptions occurred in 2005 and 2006 (eg, the Varig bankruptcy case), in most instances where lessors have sought to repossess leased aircraft they have been able to secure possession in Brazil in a matter of days. Compared to other jurisdictions, this repossession precedent is relatively good.
Over the past two years, several changes have occurred in the procedures that have resulted in longer periods for exporting and deregistering aircraft repossessed from Brazilian lessees. From the perspective of foreign financiers, compliance with export formalities might not seem directly relevant since it is the Brazilian importer that is responsible for such compliance. However, since satisfactory completion of export formalities is a prerequisite to deregistration from the Brazilian register, the issue is one of paramount importance to foreign lessors and lenders.
The changes have not been caused by alterations to applicable laws and regulations, but by changes in interpretations of existing rules. Although these changes have made it more difficult and time-consuming to export repossessed aircraft, there is reason to believe that the procedures will improve soon. Most of the repossession cases of the past few years have been for private fixed-wing aircraft and helicopters. The last large-scale repossession and export of commercial aircraft occurred in the Varig case of 2005 to 2006, so these negative developments have not yet affected repossessed commercial aircraft.
Characteristics of financed aircraft
To understand the export procedures it is important to bear in mind a few general characteristics of nearly all financed aircraft in Brazil, both commercial and private:
- Most aircraft financed for Brazilian operators are registered in the Brazilian registry. A relatively small number of financed business jets are registered with the Federal Aviation Authority or other registers. However, this number is decreasing due to new restrictions on the regular operation of foreign aircraft in Brazil. Brazil's commercial airlines have always been required to register their fleets on the Brazilian register.
- Most aircraft transactions with Brazilian operators are structured as operating leases without purchase options. The reason for this is driven by tax considerations.
- The customs rules pursuant to which aircraft are imported into Brazil under operating leases are called the 'temporary admission rules'. These rules have their own particular procedures and in several aspects differ from the rules applicable to aircraft imported by purchasers or lessees under finance leases.
An aircraft imported into Brazil under temporary admission rules is imported by the Brazilian operator. A non-Brazilian entity would not have standing to apply for temporary admission or other import approvals. Consequently, export authorisations should also be sought by the Brazilian importer of record. However, in repossession situations the importer may be uncooperative or financially distressed and uninterested in assisting in the export and deregistration process. When this occurs, the lessor or its counsel must procure the required export authorisations.
The basic requirements for export are an export registration and a customs clearance declaration. A statement that no amounts are due to the airport and navigational authorities is also required. Furthermore, the original certificates of registration and airworthiness should be tendered to the Brazilian Aeronautical Registry. Assuming such originals were onboard the aircraft at the time of repossession, this requirement is easily satisfied. If the originals were not onboard, there are other ways to meet this requirement. In any event this requirement is likely to be repealed shortly.
Problems arising in relation to export
The problems that have arisen recently relate to the export registration and the customs clearance declaration. It was previously common for judges, when rendering decisions for repossession of leased aircraft, to issue orders addressed to the customs authorities for the issuance of all approvals required for the export of an aircraft. However, there has been a growing trend among courts to refrain from issuing such orders, in part because the courts with jurisdiction to adjudicate repossession cases are state courts and the customs authorities are federal. This did not seem to be an impediment to courts several years ago, but in a number of more recent repossession cases, state court judges have refused to issue orders to the customs authorities on the basis that they do not feel that they have the authority. Similarly, in a few cases where such orders have been issued, the customs authorities have questioned whether they are required to comply with the orders.
In the absence of a court order addressed to the customs authorities, some lessors have had limited success by using deregistration powers of attorney issued by lessees at the onset of a lease term. However, the use of such powers of attorney has not been universally accepted and in some cases it cannot be used to export an aircraft. For example, in one recent case such a power of attorney was used to obtain authorisation for definitive importation of a repossessed aircraft being sold to a Brazilian buyer. The Federal Revenue Service in that case indicated that the deregistration power of attorney would not have been accepted for the purposes of authorising definitive export.
Another problem is that the issuance of the export registration is now entirely electronic and requires entry of a password that is usually in the possession of the original importer or its customs broker. Therefore, even if a court has determined that the lessor is entitled to possession of its aircraft, the lack of this password could be a serious obstacle to obtaining export authorisation and deregistration.
If and when this occurs, the next logical step would be to seek an order from a federal court. The federal courts would not have jurisdiction to hear repossession cases, so a new case must be filed against the Federal Revenue Service (which includes the customs authority). For a lessor that may have spent several weeks or months obtaining an order for repossession, the need to file an entirely new lawsuit against the federal government is unattractive. However, in some cases there may be no alternative. In the federal court system there is a procedure to obtain a writ on an expedited basis. If granted, the writ can be obtained in a few days; however, if the writ is not granted, the case will proceed at a slower pace and could result in a delay of weeks or months. This would be especially frustrating since the foreign lessor, in essence, has no dispute with the Federal Revenue Service and would have to file a complaint merely to meet export formalities.
Ironically, there are (or should be) no tax issues between a foreign aircraft owner and the Federal Revenue Service. Aircraft imported into Brazil under the temporary admission regulations mentioned above are exempt from the payment of most taxes that might otherwise apply to imported aircraft. The exemption can be lost in the case of a violation of the temporary admission rules, but liability for such violations lies with the importer, not the foreign owner. The importer must give a written undertaking to the Federal Revenue Service at the time of importation that it will pay taxes arising from such violations.
Against this scenario of unjustified delay, there is reason for optimism. On March 1 2012 the Cape Town Convention on International Interests in Mobile Equipment and the attendant Protocol to the Convention on Matters Specific to Aircraft Equipment became effective in Brazil. Among the declarations Brazil made in order to implement the Cape Town Convention is a declaration that the provisions of the Aircraft Protocol relating to irrevocable deregistration and export request authorisations (IDERAs) are effective in Brazil. An IDERA is a variation of the traditional deregistration power of attorney that aircraft leases have required for decades.
At this time it is impossible accurately to predict how IDERAs may change current practices. The Brazilian Aeronautical Registry has informed the aviation industry of its intention to deregister aircraft within five business days of receipt of a request from the party named in an IDERA. This policy has not yet been formally adopted, but is expected to be published imminently. A request for deregistration pursuant to an IDERA must be accompanied by evidence that the debtor (usually the lessee), all guarantors and other parties that may have rights over the aircraft have been notified of the lessor's intent to deregister the aircraft. With that evidence, and evidence that the applicant has standing under a filed IDERA, deregistration can proceed without the need to seek authorisation from the Federal Revenue Service. The National Agency for Civil Aviation intends to serve as liaison with the Federal Revenue Service in relation to aircraft exports.
If the use of IDERAs proceeds as announced, Brazil will be among the safest jurisdictions worldwide for aircraft finance. At a minimum, the worrisome trend of requiring foreign lessors to file cases against the Brazilian government to comply with export formalities should end. In most cases the provisions of the Cape Town Convention do not apply to aircraft already registered in Brazil; however, the innovation announced for aircraft covered by the convention should influence repossession procedures for other aircraft as well.
This update does not deal with the issuance of certificates of airworthiness for export, as the need for such certificates depends on the requirements of the next jurisdiction of registration. Lessors repossessing aircraft must also determine whether a certificate of airworthiness for export addressed to the aviation authority of the next registration is necessary and, if so, must procure such a certificate from the National Agency for Civil Aviation. Aircraft owners repossessing aircraft in Brazil should seek specific advice from counsel.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599), fax (+1 561 431 5808) or email ([email protected]).