ASIC alleges Rex Airlines directors mislead investors

Australia’s corporate watchdog has begun legal proceedings against Rex Airlines, alleging the company’s directors misled investors on the financial health of the embattled company as far back as early 2023.

ASIC announced its move against Rex on Wednesday, alleging the company engaged in “misleading and deceptive conduct” and failed to meet its continuous disclosure obligations as a publicly listed company.

“ASIC will also allege former executive chair Lim Kim Hai was involved in Rex’s continuous disclosure breach and that Mr Lim, along with John Sharp AM, Lincoln Pan and Siddharth Khotkar, contravened their directors’ duties,” ASIC said.

“ASIC will allege Rex released a misleading ASX announcement on February 28, 2023 stating Rex was ‘optimistic the Group will have positive operating profits for the full financial year 2023 barring any further external shocks’.

“ASIC will allege that Rex did not have a reasonable 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.

“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 June 20, 2023, forecasting a $35m operating loss for the financial year ending June 30 2023.”

A publicly listed company means its shares are traded on the open market, like the ASX, and any member of the public can buy up pieces of the business.

But a listing comes with a sweep of regulatory requirements, including accurate reporting on a company’s financial health and position.

The requirements are designed to compel companies to be honest about their financial status so investors can make informed decisions about whether they want to invest in the business.

The legal proceeding will play out in the NSW Supreme Court.

ASIC chair Joe Longo said the watchdog’s case would allege “serious governance failures” at Rex.

“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,” he said.

“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 proceeding is the latest blow to rock the troubled airline.

Rex, Australia’s third largest airline after Qantas and Virgin, entered voluntary administration on July 30.

It is understood Rex entered administration with $500m in debt.

ASIC added it would seek a declaration of contravention against Rex, but it would not seek pecuniary penalties against the company.

A declaration of contravention is a formal statement indicating that a company has violated the law.

But it would seek declarations, pecuniary penalties and disqualification orders against Mr Lim, Mr Sharp, Mr Pan and Mr Khotkar, ASIC said.