By Sumeyya Ilanbey
The corporate regulator warned the Albanese government it was investigating Regional Express for serious governance failures before the Commonwealth controversially tipped $80 million into bailing out the collapsed airline.
Australian Securities and Investments Commission chair Joe Longo on Wednesday revealed he had briefed Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones that the regulator was planning to launch legal action against Rex and four directors – including former Howard minister John Sharp – for misleading and deceiving investors about its profitability.
ASIC chair Joe Longo says the reasoning behind the funding for Rex was a matter for the government. Credit: Justin McManus
“In matters of this nature that have a public interest, we, from time to time, will brief the government about the existence of the investigation and its progress, and we did that when we gave the government briefings about the progress of the investigation prior to the injection of the funding,” Longo said at a press conference.
“It’s really a matter for the government as to what its reasoning was and what position it took in making that funding.”
Transport Minister Catherine King last month announced the government would provide Rex with $80 million to keep operating regional routes after the airline entered voluntary administration in July.
At the time, King did not reveal whether the money was a loan or a grant, but on Wednesday said the federal government had provided a “conditional loan” to the airline. That funding has allowed Rex to continue flying until June, after the federal election that is due by May.
“[The loan], along with our ticket guarantee, ensures that regional Australians continue to have access to the services they need and can continue booking with confidence,” the minister said.
ASIC is now taking Rex and directors Sharp, Lim Kim Hai, Lincoln Pan and Siddharth Khotkar to the NSW Supreme Court over “serious governance failures”, alleging they misled the market in February 2023 about the health of the company’s finances.
In a statement to the ASX last year, Rex claimed it was “optimistic the group would have positive operating profits for the full year 2023 barring any further external shocks”.
But Longo has alleged the airline did not have a reasonable basis to make that claim because by then it had already incurred losses for the financial year to date, and it did not prepare an earnings forecast for the year before its declaration.
Rex is being sued by the corporate regulator.Credit: Kate Geraghty
Rex subsequently issued a profit warning on June 20, 2023, flagging a $35 million operating loss for the financial year ending 10 days later.
Rex shares lifted 1¢ to $1.51 after the February update and fell from $1.21 to $1.06 after the June 20 downgrade. The stock was trading at 57¢ when it entered into administration.
Longo said: “At the time there were nine directors of Rex, but ASIC conducted a very comprehensive investigation of each director’s involvement in the release of the financial results of the company … and the commissioners made a decision that the evidence was sufficient to bring an action against four directors.
“The other five directors were not as involved in the release of the information that ASIC alleges is misleading.”
Rex director and former federal transport minister John Sharp.Credit: Janie Barrett
Former executive chair Hai has been accused of drafting and approving the statement released to the ASX on February 28, 2023, and failing to take steps to ensure the market had accurate information.
The claim alleges Sharp, Pan and Khotkar became aware of the company’s finances from April 14 and failed to inform investors. Sharp, Hai and Pan remain on the board.
When asked if it was appropriate for the federal government to pour public funds into the airline while the three directors who are being sued remained on the board, Longo declined to comment.
ASIC is not seeking financial penalties against Rex, but wants the Supreme Court to rule the airline contravened the Corporations Act. The regulator also wants the court to fine and disqualify Lim, Sharp, Pan and Khotkar.
In a statement, Sharp said he would be defending “the matter vigorously”.
“I do not believe I have breached any regulations,” he said.
Hai, who was the largest shareholder of Rex, directly held almost 19 million shares in the airline in 2022-23, while Sharp had a direct interest in 50,000 shares, according to the most recent annual report, which does not show Pan or Khotkar having any shares in the airline.
The report also showed Hai, Khotkar and Pan were not paid salaries for their roles on the board, while Sharp’s fixed pay was $140,000.
Rex entered voluntary administration in July after its failed attempt to run flights between major capital cities. The airline had been struggling with successive losses for years despite a string of profitable months at the start of the last financial year.
It had been crippled by a global shortage of pilots, competition from its bigger rivals and the costs associated with flying on major domestic routes, forcing it to suspend a string of regional routes over the past year.
Longo said high standards of corporate governance were critical and underscored a successful business.
In 2021, the airline was fined $66,000 for breaching continuous disclosure laws after Sharp gave an interview to the Australian Financial Review revealing Rex’s expansion plans before the market was informed.
Rex administrators EY said it would be inappropriate to comment as the matter was before the courts.
Prime Minister Anthony Albanese told reporters in Sydney he was not aware of Longo’s claims his ministers had been briefed on the investigation, and wanted to remain “circumspect” because of the legal proceedings.
“We need to have regional flights in the regional cities,” Albanese said. “One of the reasons why we had regional slots at Sydney airport is that people need to be able to get into the capital cities and get out at the end of the day. That’s a lifeline for those communities.”
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