Under a reorganization proceeding, the court orders a stay of enforcement proceedings against a debtor company, which then has 180 days to seek an agreement with its major creditors under a plan. The plan of reorganization is submitted to a creditors’ meeting and must be approved by each of four classes of claims, or meet alternative criteria under the cram down provisions of Law 11,101, to be confirmed by the court. While the plan may affect secured, unsecured and labor creditors, it cannot impair other claims, such as those deriving from non-payment of taxes or certain types of leasing agreements, or secured by chattel mortgages or fiduciary assignments. However, not even creditors holding a chattel mortgage can take possession of assets that are essential to preserve the continuance of debtor’s activities during the 180-day stay period.

According to article 199, paragraph 1, of Law 11,101, as amended shortly after Varig (the then-largest Brazilian airline) filed for court protection, the rights deriving from aircraft and aircraft engine leases are not subject to the reorganization and cannot be suspended or in any way affected by the debtor reorganization or bankruptcy liquidation. As such, claims deriving from such aircraft lease agreements are not impaired by a reorganization proceeding, and the contractual rights can be freely exercised by the lessors. Likewise, lessors are allowed to procure the regular remedies to seek repossession of leased aircraft from a company that has gone into a bankruptcy liquidation proceeding.

Such rules are in accordance with the Cape Town Convention on International Interests in Mobile Equipment and the Annexed Aircraft Protocol. The Cape Town Treaty entered into force in Brazil in 2013, with the enactment of Federal Decree 8,008, and contains additional rules allowing the creditor to immediately take possession of the leased aircraft and enforce its claims according to the agreement. The debtor is only allowed to retain possession of the aircraft if it remedies all defaults (other than the default related to the commencement of the proceeding) and agrees to perform all future obligations under the agreement. In any case, no obligation of the debtor under the lease agreement may be modified without the consent of the creditor.

There haven’t been relevant airline insolvency procedures after 2013 to test the provisions of Cape Town Convention. In past reorganization proceedings, courts have applied the provisions of law 11,101 and its article 199, allowing the creditor to take possession of the aircraft and enforce its claims, regardless of the 180-day stay period and of any impairment the reorganization plan may have imposed to affected creditors.

In some cases, however, there have been discussions – some of which led to decisions unfavorable to lessors – on whether the creditor should be allowed to take repossession of the aircraft while the stay of proceedings is in effect, or whether the remaining claims, after the aircraft is recovered, shall be considered an unsecured claim under the reorganization plan, or shall be entitled to separate satisfaction. Even though the outcome is generally favorable to creditors – which have ultimately managed to revert court decisions, or reach satisfactory agreements with debtors –, they should keep an eye on distressed situations and act expeditiously to avoid being caught in time-consuming and potentially stressful litigation.

For more information contact João Paulo Servera, Cascione’s Aviation and Aircraft Finance partner (jpservera@cascione.com.br) and/or Paulo Campana Filho (pcampana@cascione.com.br), head of Cascione’s Insolvency practice.