ASIC suing Rex Airlines and four directors

Corporate regulator ASIC is suing Rex Airlines and four of its directors, including a former federal transport minister, for alleged “misleading and deceptive conduct” over the disclosure of profitability.

The Australian Securities and Investments Commission’s chair, Joe Longo, said ASIC will contend Rex breached its continuous disclosure obligations by failing to disclose a material downgrade, despite being aware when it issued the February ASX announcement that the company was unlikely to achieve an operating profit.

Rex subsequently announced a downgrade on 20 June 2023, forecasting a $35 million operating loss for the financial year ending 30 June 2023.

“Our case will allege serious governance failures at Rex,” Mr Longo said in a statement.

“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.”

ASIC has already initiated legal proceedings in the Supreme Court of NSW, seeking leave to allege Regional Express Holdings Limited (administrators appointed) engaged in misleading and deceptive conduct and contraventions of continuous disclosure obligations.

ASIC will also allege former executive chair Lim Kim Hai was involved in Rex’s continuous disclosure breach and that he, along with John Sharp (a federal transport minister in John Howard’s Coalition government), Lincoln Pan and Siddharth Khotkar, contravened their directors’ duties.

ASIC will allege Rex released a misleading ASX announcement on 28 February 2023 stating Rex was “optimistic the group will have positive operating profits for the full FY23 barring any further external shocks”.

The regulator alleges Rex did not have a proper basis for that claim for a number of reasons, including because it had incurred operating losses in the financial year to date, and it did not prepare a financial forecast for FY23 before issuing the announcement.

The case alleges Mr Lim contravened his directors’ duties between 28 February 2023 and 20 June 2023 by drafting and approving the 28 February 2023 announcement and failing to take steps to prevent Rex from breaching continuous disclosure rules.

ASIC will also allege that the other three directors became privy to financial information on 14 April 2023, which should have led them to take steps to ensure that Rex updated the market in accordance with its continuous disclosure obligations prior to 20 June 2023.

“Continuous disclosure of market-sensitive information is fundamental to upholding the integrity of our public markets and supporting a fair and efficient financial system,” Mr Longo said.

“Directors of listed entities play a critical role in ensuring companies comply with their continuous disclosure obligations. Failing to take reasonable steps to ensure a company is compliant is not acceptable.”

ASIC seeks leave to commence the proceedings against Rex as it is in administration. While ASIC will seek a declaration of contravention against Rex, it will not seek pecuniary penalties against the company.

But the regulator will seek declarations, pecuniary penalties and disqualification orders against Mr Lim, Mr Sharp, Mr Pan and Mr Khotkar.

Rex, Australia’s third largest airline, is listed on the Australian Securities Exchange, although Rex shares were suspended from trading when it entered voluntary administration on 30 July 2024.

On 18 May 2021, ASIC announced that Rex paid an infringement notice of $66,000 issued by ASIC for an alleged continuous disclosure breach.

Rex was thrown an $80 million lifeline by the Federal Government last month to keep its planes flying until after next year’s federal election.

Labor delivered the funds to administrator Ernst & Young Australia (EY), which has requested an extension of the process until the end of the financial year.

Transport Minster Catherine King said the government was working with administrators to ensure essential connectivity to regional and remote communities.

“Rex’s continuation is in the best interests of Australia and the government is working closely with the administrators to ensure a strong regional aviation presence now and into the future,” Ms King said.

Original Article published by Chris Johnson on Riotact.