The Australian Securities and Investments Commission (ASIC) has commenced legal proceedings in the Supreme Court of New South Wales seeking leave to allege that Australian airline Regional Express Holdings (known as Rex) engaged in misleading and deceptive conduct and contraventions of continuous disclosure obligations.
According to a December 11 announcement, ASIC will also allege former executive chair Lim Kim Hai was involved in Rex’s continuous disclosure breach and that Lim, along with John Sharp, Lincoln Pan and Siddharth (Sid) Khotkar, contravened their directors’ duties.
ASIC will allege Rex released a misleading Australian Securities Exchange (ASX) announcement on February 28, 2023 stating Rex was “optimistic the group will have positive operating profits for the full FY 2023 barring any further external shocks”. ASIC will allege that Rex didn't have a reasonable basis for that claim because it had incurred operating losses in the financial year to date, and it didn't prepare a financial forecast for FY 2023 before issuing the announcement.
The regulator said that it 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 A$35 million ($22.2 million) operating loss for the financial year ending June 30, 2023.
ASIC chair Joe Longo said, “Our case will 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. 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 will allege Lim contravened his directors’ duties between February 28, 2023 and June 20, 2023 by drafting and approving the February 28, 2023 announcement and failing to take steps to prevent Rex from breaching continuous disclosure rules.
ASIC will also allege the other three directors became privy to financial information from April 14, 2023 which should have led them to take steps to ensure Rex updated the market in accordance with its continuous disclosure obligations prior to June 20, 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,” 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 said that while it will seek a declaration of contravention against Rex, it will not seek pecuniary penalties against the company. ASIC said that it will seek declarations, pecuniary penalties and disqualification orders against Lim, Sharp, Pan and Khotkar.
Hong Kong-based Pan is partner and co-head private equity at PAG and Khotkar is PAG’s managing director Australia and New Zealand.
In November 2020, subsidiary PAG Regulus Holdings, a subsidiary of PAG, agreed funding of A$150 million ($95.4 million) to be used to expand Rex’s operations in 2021.
After trying to expand to major routes in Australia and coming up against fierce competition, ealier this year in July Rex entered voluntary adminisration owing thousands of creditors money and with the Australian government controversially agreeing to offer the troubled firm A$80 million in support in recent weeks.
EY is the airline's administrator and has been given until June 2025 to find a suitable buyer for the airline. EY declined to comment when approached by FinanceAsia.
A spokesperson for PAG told FA declined to comment on the matter but confirmed that Pan and Kohtkar “will be defending the allegations”.
Sharp told Australian broadcaster ABC that he believes he didn't breach any regulations and would "defend the matter vigorously".
