Change of scenario for aircraft lessors Brazil – New rule governing repossession in judicial restructurings

Article 199 of the New Brazilian Bankruptcy Law, which deals with the rights of aircraft lessors in judicial restructuring, has recently been amended by Law No. 11,196 of November 21, 2005. The amendment was motivated by the judicial discussion which took place in Varig’s current judicial restructuring process, with regard to the right of aircraft lessors to repossess the leased equipment during a judicial restructuring proceeding. When approving the new bankruptcy law the clear intent of the Brazilian Congress was to protect the rights of aircraft lessors who entered into leases with Brazilian airliness since the airlines, through their association, argued that this would reduce the lease payments for solvent airlines.

However, when Varig filed for its judicial restructuring it requested, and was granted, a temporary restraining order against its lessors, which enjoined them from repossessing Varig’s aircraft in Brazil. An ancillary proceeding was also filed by Varig in New York, under section 304 of the U.S. Bankruptcy Code, and a temporary restraining order was granted barring creditor actions to seize Varig planes within the US.

The decision granting Varig’s request for such restraining order in Brazil was based on a terminological issue arising from the sole paragraph of Article 199 of the New Bankruptcy Law. The original language of such paragraph stipulated that the rights of lessors, including the right to repossess, deriving from “mercantile leasing agreements”, would not be suspended in the event of a judicial restructuring. Varig’s lawyers argued that the agreements entered into with its lessors did not qualify as “mercantile leases” under the Brazilian Aeronautics Code (Law No. 7,565/1986), and could thus not benefit from the exemption provided under article 199. Pursuant to Varig’s arguments, its leasing agreements were “simple” (as opposed to “mercantile”) since they did not provide for the option to purchase the leased equipment at the end of the leasing period.

The recent amendment to Article 199 of the Bankruptcy Law has put an end to the discussion. The new language of Article 199 provides that all kinds of leasing (either “mercantile” or “simple”) of aircraft and aircraft components are exempted from the effects of the lessee’s judicial restructuring, i.e., should an airline file for judicial restructuring in Brazil, the right of lessors to repossess the leased equipment shall be preserved. In any event, Law No. 11.196 expressly provides that it is not applicable to proceedings filed before its enactment, i.e., the new language of Article 199 of the Bankruptcy Law shall not affect the decisions already taken in Varig’s case. Additional information on the above may be obtained directly from Thomas Benes Felsberg at thomasfelsberg@felsberg.com.br.