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22 April 2020
Like most countries around the world, Brazil is suffering from the COVID-19 crisis. Since the middle of March 2020, most retail businesses have been ordered to close in Brazil's largest cities. In addition, Brazil's borders have been closed to virtually all entrants other than Brazilian citizens and their immediate family members. This has abruptly halted the demand for passenger air transport: demand for international flights has dropped by more than 95% and demand for domestic flights has dropped by at least 80%. This has had an obvious adverse effect on air operator revenue (with the exception of demand for cargo flights). In addition, the value of the Brazilian real has fallen by more than 10% since the crisis began. This has forced Brazilian businesses with real-based revenue to spend more to acquire US dollars to pay for aircraft rent, parts and in some cases maintenance.
Through the Brazilian Bank for Social and Economic Development (Banco Nacional de Desenvolvimento Economico e Social), a bank owned by the federal government, it is likely that loans or other forms of economic assistance will be provided to the country's national carriers. As of the time of writing, that assistance has not yet been disbursed; however, disbursement may begin imminently. In the meantime, a draft law providing emergency relief (PL1397/2020 (the draft law)) has been submitted to the lower house of Congress. To become law, it would have to be approved by the lower house, the upper house (the Senate) and the president.
If passed, the draft law would affect not only the aviation sector, but the economy as a whole. The draft law was prepared in the context of a long-term project to amend and restate the Bankruptcy Law. That project appears to be on hold temporarily. The impact of the draft law on the rights of aircraft lessors would be significant and 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 Cape Town Convention). The Cape Town Convention has been effective in Brazil since May 2013. Further, in March 2016 Brazil was added to the list of jurisdictions with qualifying declarations produced under the auspices of the Organisation for Economic Cooperation and Development (OECD). Being on that list entitles participants in the Brazilian aviation sector to qualify for special export credit agency discounts.
The main aspects of the draft law that would run afoul of the Cape Town Convention are new stay periods. According to the draft law, all execution actions pending or filed against certain debtors (most, if not all of Brazil's aircraft operators would qualify) for obligations arising from 20 March 2020, would be stayed for 60 days from the date on which the draft law becomes effective. The draft law further provides that if, at the end of the 60-day period, a debtor has not reached adequate agreements with its creditors, it may apply to a bankruptcy court requesting the appointment of a 'negotiator' (ie, a person or entity named by the debtor to centralise negotiations with its creditors). For an additional 60-day period, the negotiator would endeavour to reach agreements with the creditors for rescheduling or otherwise amending debt falling due after 20 March 2020. If, at the end of the second 60-day period, no agreement is reached, the debtor would be entitled to apply for bankruptcy protection (called 'judicial recuperation' in the Bankruptcy Law).
Each of these new stay periods would conflict with the obligations assumed by Brazil under the Cape Town Convention, in particular the declaration made in respect of Article 13 of the Cape Town Convention, which entitles lessors and other creditors to 'speedy relief', which includes possession of a leased assets within 10 working days. Brazil's record for compliance with the Cape Town Convention is already under scrutiny due to the failure of the Brazilian judiciary to uphold time periods prescribed in the Cape Town Convention during the judicial recuperation process of Oceanair Linhas Aereas (also known as 'Avianca Brasil') in 2019. If the draft law were to become effective as currently drafted, the new protection for Brazilian carriers would seriously affect Brazil's compliance level with the Cape Town Convention.
Violations of the Cape Town Convention risk at least three negative consequences. First, the aircraft leasing community, already aware of the results of the Avianca Brasil case, could become stricter in terms of offerings and costs when leasing to Brazilian carriers. Compliance with the Cape Town Convention is viewed by most aircraft lessors as a prerequisite for leasing into certain jurisdictions where the rule of law may be questionable. A second possible outcome would be removal from the OECD list of jurisdictions with qualifying declarations. Such removal is probably not an imminent risk due to the OECD's procedures; however, removal is possible. The third risk relates to a Cape Town Convention Compliance Index being compiled by the Aviation Working Group. This index scores Cape Town Convention jurisdictions on compliance. Brazil's score, already prejudiced by the Avianca Brasil case, stands to fall further if the draft law is adopted in its current form.
There are some aspects of the draft law that demonstrate recognition of creditor interests even though they would not avoid Cape Town Convention violations. For example, the draft law would not apply to new agreements or rescheduling or restructuring amendments entered into after 20 March 2020. The basic premise of the draft law is that debtors and creditors have an opportunity to negotiate a way forward during the COVID-19 crisis. If negotiations occur after 20 March 2020, which was the date that the government declared a state of emergency, then further stays against execution actions would not be necessary. How the judiciary would react to repossession or other enforcement actions on such agreements is unknown; however, the draft law focuses on giving debtors limited opportunities to deal with the current extraordinary circumstances. In addition, the draft law would expire at the end of 2020, unless extended.
The focus and aim of the draft law are understandable considering the current economic uncertainty arising from the COVID-19 crisis. However, Congress and the president would be wise to consider how the draft law might, in the medium to long term, prejudice Brazil's airlines by resulting in more limited leasing opportunities and increased costs.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599) or email (firstname.lastname@example.org). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
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