In Brazil aircraft lessors benefit from special provisions, excluding their claims from any judicial reorganization proceedings. Recent court decisions have raised doubts about the special regime for aircraft lease, only to reaffirm the special regime in the final decision on the merits.
Brazilian legal framework
Pursuant to the Section 49 of the Brazilian Federal Law 11,101 of February 9, 2005 (Brazilian Bankruptcy Law), creditors under any lease arrangements are not subject to judicial reorganization procedures and the terms and conditions of lease agreements continue to be binding while such procedures are pending. The only exception is that repossession will not be possible during the 180-day stay period, in circumstances where the leased asset is a fixed asset considered essential to the business activities of the company.
In addition to this general rule, insolvency proceedings involving the aircraft industry are subject to specific treatment. Paragraph 1 of Section 199 of the Brazilian Bankruptcy Law provides that “in no circumstances will the rights arising out of lease agreements of aircrafts or their parts be suspended”.
Going further, Paragraph 2 provides that credits arising out of lease agreements of aircrafts and their parts are not subject to judicial reorganization procedure or prepackaged reorganizations, assuring that the rights of property over the leased asset and the contractual provisions should be respected. It also explicitly clarifies that the aforementioned carveout for essential fixed assets is not applicable to aircrafts and their parts.
Adding another layer of legal protection to aircraft lessors, in 2011,
Brazil ratified the
Cape Town Convention on International Interests in Mobile Equipment (Convention) and the
Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“Protocol”, and together with the Convention, the “Cape Town Convention”).
Brazil declared that it would apply Article XI, Alternative A, of the Protocol to all insolvency-related events, and that the waiting period would be 30 calendar days from the date of the commencement of the insolvency proceedings.
It is only recently, however, that such accession to the Cape Town Convention has been put to the test before the Brazilian Courts.
The Avianca Brasil case
On December 10, 2018, Oceanair Linhas Aéreas S.A. and AVB Holding S.A. (jointly, “Avianca Brasil”) filed for judicial reorganization. The following day, the 1st Court of Bankruptcies and Judicial Reorganizations of the City of São Paulo admitted the case and granted injunctive relief in order, among other things, to suspend repossession actions by lessors of aircraft, referring, in essence, that such measure was necessary, given the serious risk of irrecoverable damages to thousands of consumers, considering the proximity of the year end and, therefore, high season for tourism.
In the wake of an objection filed by a lessor, the Judge reconsidered the decision, on December 13, 2018, limiting the suspension of repossession of aircrafts to 30 days and scheduling a hearing for January 14, 2019. In that decision, the Judge highlighted that, although Section 199 of the Brazilian Bankruptcy Law excludes lease agreements from judicial reorganization, the principle of preservation of the going concern and its social function could lead to the mitigation of such provision.
During the hearing, the parties agreed to extend the suspension until February 1, 2019, and Avianca Brasil undertook the following obligations:
- to present a proposal of payment of all overdue and unpaid obligations and/or a schedule for the orderly return of the aircrafts and engines; and
- to timely pay any obligations falling due after February 1, 2019, on the terms and conditions originally agreed upon.
The ensuing negotiation was unsuccessful, and, on February 1, 2019, the Judge decided to extend the stay on the repossession until the general creditors’ meeting. Several appeals were filed against such decision to the Court of Appeals of the State of São Paulo and, in one such appeal, a lessor obtained an injunction authorizing it to immediately take possession of its aircraft. Avianca Brasil promptly requested a provisional measure from the Superior Court of Justice, in order to suspend the injunction from the Court of Appeals.
The President of the Superior Court of Justice decided to grant Avianca Brasil the requested provisional measure, suspending the Court of Appeals’ injunction until the general creditors’ meeting scheduled to take place on March 29, 2019.
In line with the trial court Judge, the decision of the President of the Superior Court of Justice was grounded on the principle of preservation of the going concern and the “relevant social function of the endeavor to recover financial health, in order to protect the interests of employees, consumers, suppliers and business partners and, ultimately, the national and international air transportation system and potential investors”. The general creditors’ meeting could not be called to order upon first call on March 29, 2019, and, as a result, the Superior Court of Justice revoked the provisional measure.
In the meantime, after response from Avianca Brasil and other interested parties the appeals of the lessors to the Court of Appeals of the State of São Paulo were decided. The decision taken by a panel of three Judges of the 2nd Chamber of Corporate and Commercial Law of the Court of Appeals of the State of São Paulo has emphasized the need to respect the Cape Town Convention, determining that the lessors were authorized to take possession of the leased aircrafts and engines:
“Arguments related to the preservation of the going concern do not satisfactorily justify the situation discussed in these proceedings, in particular the issues in respect of creditors which are not subject to the judicial reorganization by virtue of express provision in the law. To the eyes of this judge, the strategy to protect the interests of the debtor, at the expense of the overall national and international strategy provided for in the legal system, is not acceptable. Admitting such accommodation would distort the purpose of the Bankruptcy Law (…) And, even considering the contention that the “greatest assets of the Companies are the contractual relations” (…), it is unacceptable to deny full application of legal provisions and to impose the burden of the confessed inability to pay and, possibly, the insolvent state, on the financial creditors, which are not subject to the proceeding (…) This does not mean barring the airlines from the possibility to pursue reorganization. It is a matter of determining that its proposal of reorganization should comply with the applicable law”.
Avianca Brasil has not appealed again to the Superior Court of Justice and has made it possible for the lessors to take possession of the leased aircrafts and parts. More recently, on July 3, 2020, Avianca Brasil requested the conversion of the judicial reorganization into a bankruptcy liquidation, but the court has not ruled on the request so far.
Lessons Learned
In summary, after some detours, the Brazilian courts have arrived at an interpretation of the local legislation that is aligned with international practice and that respects the accession of Brazil to the Cape Town Convention.
In our view, there is little room for interpretation in this area, as the Brazilian legal system – in particular, Section 199 of the Brazilian Bankruptcy Law and the legislation ratifying the Cape Town Convention – is clear. General principles, such as preservation of going concern or social function, should not be enough to justify interpretations against or overriding the literal and clear wording of the law.
In this case, the 30-day waiting period under the Cape Town Convention had long expired when the lessors were finally able to take possession of the aircrafts leased to Avianca Brasil. The Court of Appeals of the State of São Paulo rightly respected the protections afforded to lessors under the legal system. It is a very important precedent that is aligned with prior Brazilian caselaw in similar situations and upholds the principles of legal certainty and stability of commercial transactions.
Nonetheless, the hesitation in applying the Cape Town Convention in the Avianca Brasil case underscores the risk that courts in more debtor-friendly jurisdictions may feel compelled to give in to the pressure to limit the rights of lessors and protect the airline, considering all the consumers, employees, suppliers and other stakeholders involved.
For more information, please contact Mattos Filho’s
Litigation and Arbitration practice.
The article was originally published by INSOL, in March 2020.
