ASIC to sue Rex Airlines alleging company misled the market about its profitability
In short:
Rex Airlines and four of its directors are being sued by ASIC over allegations they misled the market about its financial position.
ASIC alleges the company knew it would not deliver a profit in the 2023 financial year in February, but failed to tell the market until June.
What's next?
The matter — which occurred a year before Rex Airlines entered administration — will be heard at the NSW Supreme Court at a later date.
The corporate regulator ASIC is suing Rex Airlines, alleging the company and four of its directors engaged in "deceptive and misleading conduct" over its profitability.
ASIC alleges Rex, along with John Sharp, Lim Kim Hai, Lincoln Pan and Sid Khotkar, failed to meet its disclosure obligations, including as company directors, by not sharing market-sensitive information that forecast a $35 million profit downgrade in June 2023 in a timely manner.
The regulator alleges that Rex told the Australian Securities Exchange in February 2023 that the company would have "positive operating profits" for the 2023 financial year, but "did not have a reasonable basis for that claim", given it had been incurring operating losses.
ASIC alleges that Rex breached its continuous disclosure obligations by failing to disclose that its financial position had been downgraded, "despite being aware when it issued the February ASX announcement that the company was unlikely to achieve an operating profit".
"Our case will allege serious governance failures at Rex", ASIC chair Joe Longo said.
"Rex's directors had a responsibility to take reasonable steps to ensure the company complied with the law and we will seek to hold them to account.
"We will allege four of Rex's directors breached their duties because they failed to take steps to ensure the market had accurate information about the company's financial performance."
The legal action from ASIC relates to the company's conduct in 2023.
Rex Airlines entered voluntary administration in July this year, after a failed attempt to offer flights between major capital cities, serviced by Boeing 737 jets. Rex's regional services continue to operate.
In a statement, the company's administrators from EY said it would be inappropriate to comment as the matter is before the courts.
On Wednesday morning, Mr Sharp — a former transport minister with the Howard government in 1996 — told the ABC he would defend the allegations made against him.
"I do not believe I have breached any regulations and as such I will defend the matter vigorously," he said.
Mr Lim told the ABC that the company ended FY23 with a positive statutory profit before tax and was unable to comment further.
A spokesperson for PAG — a private equity firm that lent $150 million to Rex in 2021 and led to Mr Pan and Mr Khotkar joining the airline's board — said both men would defend the allegations.
ASX referral led to investigation
Speaking to the ABC on Wednesday morning, Mr Longo said ASIC began investigating the company before it entered administration.
"This investigation has been going on since last year, arose out of an ASX referral, and the investigation was ongoing at the time the company went into administration," he said.
However, Mr Longo stressed that ASIC was not alleging Rex had been trading while insolvent, and that issue would not be raised in the court proceedings.
"The heart of these proceedings is a failure by Rex to keep the market properly informed of its financial position," he said.
"It did not comply, we allege, with its continuous disclosure obligations. It misled the market in what it said, and the four directors that we have taken proceedings against, we allege failed to take the steps they should have taken as directors to ensure that the company complied with its obligations.
"This case is all about disclosure, it's not about insolvent trading."
Regional Express is still operating flights even though the company is in administration. (ABC South East SA: Sandra Morello)
Mr Longo said ASIC originally looked at all of the company's directors, before deciding to pursue action against four.
"In the end, we took the view that the evidence simply didn't go to the standard that would warrant the commencement of proceedings against the other directors," he said.
"That took into account the roles of the other directors, the reliance those directors placed on the directors we did take proceedings against, but essentially it was a question of the strength of the evidence.
"But it was a lineball decision."
Even though ASIC began investigating the company over the issue before it entered administration, in July Mr Longo believed there was still a link between the two.
"Corporate governance isn't sort of a theoretical concept. There's clearly a link. It is a fundamental expectation of directors that they will continuously monitor the financial performance of … any company that they're a director of," he said.
"And if they're not doing that properly, then that over time, that will certainly increase the risk of the company getting into financial difficulty, which is clearly what happened here with Rex."
ASIC chair Joe Longo believes there is a link between Rex's governance and it entering administration. (ABC News)
Penalties 'a matter for the court'
ASIC is only seeking a "declaration of contravention" against Rex, not a financial penalty against the company.
However, the four directors — Mr Lim, Mr Sharp, Mr Pan and Mr Khotkar — could be fined if they are found guilty of the contraventions.
"We'll be seeking pecuniary penalties against all the directors and disqualification orders," Mr Longo said.
"What the amount of those penalties would be and the length of the disqualification is too early to talk about now, that's a matter for the court after a hearing.
"I should also say that we will not be seeking … a penalty against the company itself, given its current circumstances."
Rex Airlines remains in voluntary administration, with the Federal Court granting a second extension to the convening period, which was set to end on November 25.
Administrators from EY have been given until June 2025 to find a suitable buyer for the business.
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