Basch & Rameh Advogados Associados
Basch & Rameh was established in January, 1996 by Kenneth Basch and Carlos Rameh. The firm specializes in international transactions. The main areas of practice are corporate (including mergers, acquisitions, shareholder agreements), corporate finance, technology, asset-based finance (aircraft, ship and oil rig finance), banking, foreign investment in Brazil, representation of Brazilian companies with investments outside Brazil, joint ventures, insurance and maritime law. The firm's clients are both non-Brazilian companies with interests in Brazil and Brazilian entities with interests abroad. The firm currently has two partners, sixteen associates, one semi-retired attorney practicing of counsel, and two legal clerks. All of the firm's lawyers and clerks are fluent in English, and some of them in Spanish, French and German as well. Basch & Rameh's main office is in São Paulo, Brazil.Show more
The COVID-19 crisis has brusquely forced businesses and professionals to close offices and work from home. Luckily, the Brazilian government began implementing measures relating to electronic filings and electronic signatures approximately 20 years ago, all of which have made closing aircraft deals from home offices relatively easy. The Brazilian Aeronautical Registry has adjusted some of its requirements on an interim basis to serve the aviation community by facilitating compliance with necessary formalities and filings.
Brazil's airlines are now being subjected to a withholding tax that has not been charged on most leases for more than three decades. Airlines may be able to successfully challenge the legality of the withholding tax; however, this will require dedication of legal and administrative resources that might have been used elsewhere to fortify the airlines. In any event, under the final text of the law, the likelihood of lessors being liable for withholding tax has been reduced significantly.
A draft law providing emergency relief due to the COVID-19 pandemic has been submitted to the lower house of Congress. The impact of the draft law on the rights of aircraft lessors would be significant and would place into question Brazil's compliance with the Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Convention on Matters Specific to Aircraft Equipment.
The Federal Government recently issued an executive order with the potential to change the tax treatment of commercial aircraft leasing. Subject to that determination, the executive order sets new rules for commercial aircraft and engine leases. However, the executive order has created considerable confusion and doubts in the aviation sector.
A number of recent aircraft repossession actions have demonstrated that a majority of judges have correctly recognised lessor rights to repossession in the face of apparent lease agreement defaults. However, these decisions have not clearly cited the Cape Town Convention as their basis. The Brazilian judiciary's failure to unify repossession actions against a bankrupt lessee in a single court has meant that some lessors are subject to minority view decisions that can be upheld on appeal.
Following developments earlier in 2019, aircraft repossession has continued to be in the spotlight – yet again with regard to the Oceanair Linhas Aéreas SA (commonly known as 'Avianca Brazil') bankruptcy and, in particular, the experience of lessors that sought repossession of leased aircraft therefrom. In this case, and contrary to Avianca Brazil's pre-bankruptcy experience, a bankruptcy court failed to uphold the express provisions of the Bankruptcy Law 2005 and the Cape Town Convention
In respect of four aircraft that were recently repossessed before Avianca Brazil obtained bankruptcy protection, the Brazilian judiciary and civil aviation agency procedures worked reasonably well and Brazil's overall performance complied with its obligations under the Cape Town Convention. While all four aircraft were exported and de-registered within approximately two weeks, Brazilian customs authorities must still reassess the current export authorisation procedure.
A tax regulation that was promulgated in 2016 has taken effect in ways that are now affecting aircraft lessors and lenders to Brazilian carriers, including by imposing requirements concerning the identification of lessor entities' ultimate beneficial owners and increasing the document disclosure requirements on lessors and lenders in cross-border aircraft finance transactions. While the full impact of the new rules is still unclear, lessors and lenders to Brazilian operators should prepare to comply.
Interchange agreements are relatively new and have been increasingly used by commercial aircraft operators in Brazil. In response to industry requests, the Brazilian Civil Aviation Agency and the Brazilian Aeronautical Registry recently clarified several applicable rules. Due to their novelty, interchange agreements are not always understood in the industry. While such agreements share some similarities with interline and code-share agreements, they have important distinctions.
For the past few months, the Brazilian Aeronautical Registry has experimented with a new electronic filing system that allows parties to file documents electronically 24 hours a day, seven days a week. This system is now operative for documents relating to commercial aircraft. Documents relating to private aircraft, business aircraft and helicopters are still being filed physically. The new electronic system is expected to become available to them during the second half of 2017.
In September 2016 the Brazilian Revenue Service unexpectedly promulgated a change in its treatment of Ireland, which had the potential to wreak havoc on the aircraft leasing sector for the entire country. After four weeks of considerable uncertainty, the changes – as they apply to commercial aircraft leases – were suspended. While the clarifications temporarily resolve the initial concerns regarding commercial aircraft leases, they provide no relief for other important sectors, such as the air taxi sector.
As the revision to the Aeronautical Code is taking longer than expected, the president promulgated interim legal measures earlier in 2016, including one change particularly relevant to air carriers – restrictions on foreign investment in airlines. Although ultimately vetoed, these measures still merit attention, as they are indicative of future legislation.
Brazil's airlines are facing unprecedented economic and financial pressures. With approximately 15 to 20% of their payment obligations fixed in US dollars, they have seen their operational profits drastically decline and are experiencing significant operating losses. Although no airline has sought bankruptcy protection, the risk that a major airline will do so is considerable and lessors should be aware of their rights and risks should this occur.
The Senate is undertaking a serious effort to revise and modernise the Aeronautical Code, which dates back to 1986. Although it is too early to know the special senate committee's final recommendations, the new code is expected to conform to the Cape Town Convention and relax existing restrictions on foreign investment in Brazilian airlines.
A common misunderstanding that arises in Brazilian aircraft finance transactions relates to post-closure requirements as, due to delays, a significant amount of the legal work on a transaction occurs after the closure date. As no magic solutions exist to avoid post-closure issues completely, lessors and financiers must accept that Brazilian transactions may take longer compared with those in other jurisdictions.
For decades, imports of aircraft and aircraft parts have been exempt from most taxes that apply to imports. However, the application of the contribution to the financing of social security tax has recently changed and some tax inspectors have begun applying the tax to aircraft imports. While most industry participants expect the courts to clarify that the tax does not apply to the import of aircraft, it is unclear whether and when this will happen.
The Cape Town Convention has now been in effect for six months, and has thus far been encouraging. The Brazilian Aeronautical Registry has become increasingly proficient at issuing authorising entry point codes. Further, the Civil Aviation Agency has demonstrated its knowledge of the convention and its willingness to enforce it, including deregistration of an aircraft on the basis of an irrevocable deregistration and export request authorisation.
A number of new regulations were recently promulgated relating to the functioning of the Brazilian Aeronautical Registry (RAB). The new regulations are a positive step towards achieving additional clarity on a variety of issues and demonstrate the RAB's responsiveness to the aviation finance community. They will be of interest to both Brazilian operators and non-Brazilian lessors and holders of security interests.
Bond requirements imposed on non-Brazilian plaintiffs in Brazilian aircraft repossession cases have been subject to uncertainties for some time. However, emerging court trends have increased the clarity of such issues and improved the procedures for the repossession of leased aircraft. While these trends and the decision have not eliminated all uncertainties, they have reduced them significantly.
Two recent changes - one legislative and one regulatory - have substantially altered the way in which aircraft may be financed for Brazilian operators. The changes affect virtually all new cross-border aircraft finance transactions, although the precise impact will depend on the type of Brazilian operator. For business aviation, the modifications are the most significant and sweeping to occur in nearly two decades.
Despite Brazil's position as a major emerging market, its transportation infrastructure is somewhat lacking. Ground-based alternatives are limited, which exerts tremendous pressure on the air transport system. As the government does not have the necessary resources to modernise its facilities, it has turned to privatisation to speed up renovation of the country's most important airports.
Despite committing to the Cape Town Convention over a year ago, Brazil's legal system requires publication of a further executive order before the convention can be fully implemented. Notwithstanding this, the government recently announced proposed rules and procedures concerning how international interests over aircraft registered in Brazil may eventually be made with the International Registry, among other things.
Mortgages given over aircraft registered in Brazil have been used for many years. However, there are several major differences between Brazilian aircraft mortgages and those given under New York or English law. An understanding of these differences assists lending institutions in deciding how to evaluate their security packages, when to require aircraft mortgages and what they can expect from such mortgages.
Since the early 1990s repossession of leased aircraft in Brazil has been a relatively efficient process, with most lessors able to secure possession of leased aircraft in a matter of days. However, 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.
In recent months Brazil has been inching closer to ratification of the Cape Town Convention on International Interests in Mobile Equipment and the attendant Protocol to the Convention on Matters Specific to Aircraft Equipment. The Senate recently approved both the convention and the supplementary protocol, completing the last legislative step in the approval process. The president is expected to ratify the convention shortly.
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 them. Occasionally, ANAC alters its policies without realising the potential consequences.
After the September 11 2001 terrorist attacks, many governments sought or were required to provide support to their national airlines in bearing the increased cost of insurance against certain war and terrorist risks. In order to deal with this, the Brazilian government passed a specific law providing certain cover to Brazilian airlines. However, the law generates many misunderstandings concerning the risks and parties covered.
Earlier in 2010 the Brazilian Aeronautical Registry promulgated several changes to its filing procedures that have caused considerable confusion and altered the way in which parties must organise closings. Its objective was to streamline the filing and registration process, and it is hoped that the new policies will result in more consistently applied policies that will help closings to proceed without delays.
Previous court cases have produced precedents that posed a threat to the voting rights of aircraft lessors in Brazilian bankruptcy restructuring proceedings. However, a recent decision by a Sao Paulo bankruptcy court and the initial vote of an appeals court panel indicate a more balanced and beneficial approach, rather than one which follows vague concepts of equity in an attempt to save airlines at any cost.
One of the innovations of the Brazilian Bankruptcy Law was to allow airlines to seek bankruptcy restructuring protection. Since the law entered into force in 2005, five Brazilian airlines have sought judicial protection to allow for restructuring - termed 'judicial recuperation' in Brazil. One such case, the VarigLog Case, created precedents that threaten the exercise of creditor voting rights.
In 2007 the monopoly that the Brazilian Reinsurance Institute had held over Brazil's reinsurance market for nearly 70 years began to end. Legislation that had been expected for 10 years was finally ratified. Part of that legislation addressed cut-through clauses in reinsurance contracts, which are particularly relevant to aviation contracts given the extent to which risk is reinsured through international reinsurance markets.
A certidão is a printed extract from the records of the Brazilian Aeronautical Registry to determine the ownership and lien status of registered aircraft. For the past few years the time required to obtain certidões has been approximately two months and in some cases even longer. However, the National Civil Aviation Agency has recently greatly improved the issuance system.
The procedures and delays involved in the export and deregistration of aircraft registered in Brazil have been attracting increasing attention over the past year. In the few months that have elapsed since this issue was first addressed in July, changes have been made to the procedures.
The procedures and delays involved in the export and deregistration of aircraft registered in Brazil have been attracting increasing attention over the past year. In many jurisdictions deregistration is a simple formality that requires the completion and filing of a few forms. In Brazil, it is considerably more complex.
For tax reasons almost all aircraft operated in Brazil are leased. Financiers new to the jurisdiction need to understand the requirements and procedures for repossession of leased aircraft in case the lessee operator defaults. One of the requirements, which applies to all lawsuits involving foreign plaintiffs, is the posting of a bond.
The Brazilian Aeronautical Code provides that the owner of an aircraft registered in Brazil is the party recorded as the owner at the Brazilian Aeronautical Registry. For the past 12 to 18 months the registry's filing procedures and requirements have been in flux and the changes have presented new challenges to aviation finance lawyers practising in Brazil.
When aircraft owners consider leasing aircraft to new jurisdictions a common due diligence issue is whether charges incurred by the lessee operator can lie in rem against the aircraft if repossessed or returned at the end of a lease term. In Brazil, two sets of potential fees can obstruct the export of a leased aircraft: airport charges and customs fees.
It is becoming increasingly common for aircraft and aircraft engines on lease to Brazilian airlines to be sold or transferred during their lease terms as part of refinancing transactions, securitizations or simple portfolio dispositions. However, since amendments to the law in 2004 such transactions risk being assessed for Brazilian capital gains tax.
Mortgages play a key role in the financing and security packages of Brazilian-registered aircraft. Under the Aeronautical Code, a mortgage granted over an aircraft registered in Brazil should be governed by Brazilian law. Furthermore, to create an aircraft mortgage the mortgage deed must be registered with the Brazilian Aeronautical Registry.
A dispute has arisen concerning the authority of a bankruptcy court to limit the powers of the Brazilian Agency for Civil Aviation (ANAC) regarding the regulation of Brazilian route rights and slots. In general, route rights and slots are regulated solely by ANAC; however, circumstances have arisen that have cast doubt on ANAC's authority.
Nearly all aircraft operated by Brazilian airlines are leased into Brazil through cross-border operating leases. For tax reasons, Brazilian airlines rarely, if ever, hold any equity in the aircraft or spare engines that they operate. The Executive has recently passed an order that alters the way Brazilian airlines lease and acquire aircraft and aircraft engines.
The Judicial Recuperation Law, which took effect in June 2005, has had a major impact on repossession in aircraft leases, particularly in the long-running Varig Case. Varig Brazilian Airlines has interpreted Article 199 of the new law as allowing it to submit operating leases to judicial recuperation protection.
The Bankruptcy Law has been amended with regard to the reorganization of airlines and aircraft leases. Under the former law, airlines were prohibited from seeking protection. The new law, for the first time in over four decades, allows Brazilian airlines to seek protection from creditors under a reorganization scheme called judicial recuperation.