Four directors of collapsed airline Regional Express fly into ASIC storm over alleged disclosure failures

The former chair of Regional Express and three other directors could be in for a bumpy ride as the corporate regulator chases them through court over alleged failures to reveal the airline’s true financial health more than a year before it collapsed.

In papers filed with the Supreme Court of NSW, the Australian Securities and Investments Commission claims the failed regional airline engaged in misleading and deceptive conduct and contraventions of its continuous disclosure obligations.

It also alleges that former executive chair Lim Kim Hai was involved in Rex’s continuous disclosure breach and that he, along with John Sharp, Lincoln Pan and Siddharth Khotkar contravened their directors’ duties by failing to update investors.

ASIC is seeking financial penalty and disqualification orders again all four.

The legal pursuit has also raised questions about the Federal Government’s decision last month to hand the airline an $80m loan facility to keep it in the air.

ASIC chair Joe Longo revealed on Wednesday that Treasurer Jim Chalmers had been told the watchdog was planning a prosecution against the directors before the bailout was announced.

Mr Longo said the watchdog’s case would allege “serious governance failures” at Rex, which was placed in the hands of administrators in July.

“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,” Mr Longo said.

The carrier has about $500 million in debt across the five groups. About 600 staff have already been made redundant.

The debts racked up as it made an aggressive push to compete on key capital city routes against bigger rivals Qantas and Virgin in 2021. A Perth to Melbourne route was launched just weeks before it collapsed.

The consumer watchdog found average fares on city routes went up 13 per cent in the two months after Rex stopped its capital city services, which included the Sydney to Melbourne route — one of the busiest in the world.

ASIC on Wednesday said Rex released a statement to the market on February 28, 2023 stating it was optimistic the group would have positive operating profits for that full financial year “barring any further external shocks”.

It will allege that was misleading because 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 the financial year before issuing the announcement.

ASIC will also claim Rex breached its continuous disclosure obligations by failing to reveal a material downgrade, despite being aware when it issued the February ASX announcement that the company was unlikely to achieve an operating profit.

Just four months later on June 20, 2023, Rex announced a downgrade and forecast a $35m operating loss for the full financial year.

“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,” Mr Longo said.

Those alleged failures include claims Mr Lim contravened his directors’ duties between the February update and the later downgrade by drafting and approving the announcement about the operating profit and failing to take steps to prevent Rex from breaching continuous disclosure rules.

ASIC will also allege that Mr Sharp, Mr Pan and Mr Khotkar became aware of financial information on April 14, 2023 which should have led them to take steps to ensure Rex updated the market in accordance with its continuous disclosure obligations before the June 20, 2023 update.

Mr Longo said continuous disclosure of market-sensitive information was fundamental to upholding the integrity of Australia’s market and supporting “a fair and efficient” financial system.

“Directors of listed entities play a critical role in ensuring companies comply with their continuous disclosure obligations,” he said.

“Failing to take reasonable steps to ensure a company is compliant is not acceptable.”

Mr Lim, a former Singaporean defence engineer, is a founding shareholder of Rex and had been executive chair for 21 years until he was suddenly replaced on June 5 this year by Mr Sharp, a former federal transport minister.

A month later, Mr Lim requisitioned a shareholders meeting to remove four of his five fellow directors and appoint two others.

Administrators from EY were appointed before that meeting was held.

EY partner Samuel Freeman told a first meeting of creditors in August there had been “quite some interest” from buyers. But four months later there are still no takers and there has been a more downbeat assessment of its future prospects.

Administrators were forced to go to the Federal Court to postpone a second meeting of creditors until July 2025, with permission granted in mid-November.

“Based on the evidence before me, it was apparent it is presently unlikely that the administrators will be able to sell the regional business,” Justice Brigitte Markovic said at the time.

The next meeting will include a vote on whether to return the Rex companies to the existing board, place them under a deed of company arrangement or to liquidate.

So far, Rex’s aero-medical arm Pel-Air Aviation has been sold, along with two plots of land near Sydney Airport, one of which houses a flight simulator.

Its fly-in-fly-out charter business National Jet Express was bought from administrators by Mr Lim, who was

While Rex permanently grounded its Boeing 737 fleet on major metropolitan routes, its regional flights have continued thanks to ongoing funding from private equity firm PAG Asia Capital.

Formed in 2002, Rex is Australia’s largest independent regional airline and makes about 1050 flights a week on 45 routes.