ASIC sues Rex, Lim Kim Hai, John Sharp, others for failing to disclose airline’s true financial state

Questions have been raised about the government’s decision to throw Rex an $80m lifeline when it was under investigation for deceptive conduct, with four directors now charged.

Rex, Australia’s third largest airline, was placed in administration this year. Picture: AFP

The corporate regulator has confirmed the Albanese government knew failed airline Rex was being investigated for deceptive and misleading conduct but still ploughed ahead with a controversial decision to throw the company an $80m lifeline.

The Australian Securities & Investments Commission filed court action against Rex on Wednesday for failing to disclose the company’s true financial position in 2023.

The Supreme Court case ­accused former Rex executive chairman Lim Kim Hai of being involved in a continuous dis­closure breach, and said fellow ­directors John Sharp, Lincoln Pan and Siddharth Khotkar contravened their directors’ ­duties by not updating the market.

Mr Sharp, Mr Pan and Mr Khotkar, who all resigned from the Rex board in April, all planned to defend the allegations. Mr Lim could not be reached.

The matter arose from an ASX announcement made on February 28, 2023, stating Rex was “optimistic the group would have positive operating profits for the full 2023 financial year, barring any further external shocks”.

Rex was placed into administration on July 30 this year, with debts in excess of $500m.

Administrators EY immediately shut down the airline’s major city operations serviced with Boeing 737s, and sought federal government assistance to continue operating regional services using Rex’s Saab 340s.

In November, an $80m loan from the government was granted to allow the regional operation to continue, as the administration was extended to June 30, 2025.

On Wednesday, ASIC chair Joe Longo said the regulator had informed the government about its investigation, and confirmed the ministers briefed included Jim Chalmers and Assistant Treasurer Stephen Jones.

“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,” Mr Longo said.

“All I can confirm is that the government was briefed about the investigation and its progress prior to the injection of the ($80m).”

Mr Longo would not say if it was appropriate for the government to give the company the lifeline, despite being aware of the investigation.

The Treasurer’s office did not respond to questions from The Australian.

Transport Minister Catherine King said the government had provided an $80m conditional loan to the administrators of Rex, to ensure people in the regions continued to have access to the services they needed.

No funding had been provided to the Rex board or any of the former company directors, none of whom was still involved in the running of the business.

Lim Kim Hai at Sydney Airport in 2004. Picture: Sam Mooy

Rex Airlines Deputy Chairman, John Sharp and Rex flight attendants. Picture: Linda Higginson

ASIC said in a statement it would allege Rex did not have a reasonable basis for its February 2023 claims of a return to profit for several reasons. First, there was the issue of its operating losses for the year to date, and second Rex had not prepared a financial forecast for the 2023 financial year before issuing the announcement.

Further, Rex failed to disclose a material downgrade despite being aware the company was unlikely to achieve an operating profit.

A downgrade was eventually announced on June 20, 2023, forecasting a $35m operating loss for the year to June 30.

Mr Longo said Rex’s directors had a responsibility to take reasonable steps to ensure the company complied with the law.

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

Although it was Mr Lim who is alleged to have drafted and approved the February 28, 2023 announcement, ASIC claimed the other three directors became privy to financial information from April 14, 2023 and should have taken steps to ensure Rex updated the market.

“We allege that they had access to information and enough to be able to challenge the correctness of the February guidance, and they failed to ask those questions and engage in a way that discharged their duties,” Mr Longo said.

“Had they done that, then the corrective material that was finally published in June would have been published a lot sooner.”

The other five directors on the Rex board were “not as involved in the release of the information” that ASIC considered to be misleading, he added.

The matter has been filed in the NSW Supreme Court, with ASIC expected to seek pecuniary penalties and disqualification orders against Mr Lim, Mr Sharp, Mr Pan and Mr Khotkar.

Disqualification orders would mean each of the men named in the action could not manage a corporation for a period determined by the court.

That would have implications for all concerned, and particularly Mr Lim, who recently acquired the remaining 50 per cent share of fly-in, fly-out airline National Jet Express for an undisclosed sum.

Mr Longo said he was not aware if the NJE acquisition had been approved, but said there were no other ongoing matters being investigated in relation to Rex’s ASX disclosures.

The Australian earlier this year revealed ASIC was investigating Rex, as the airline’s financial woes deepened and the board erupted into chaos when Mr Lim was ousted by his directors for what they perceived to be corporate governance failures.

In retaliation, Mr Lim sought to use his majority stake in Rex to force out the directors who voted against him, but did not get the opportunity when administrators were appointed.

Mr Pan and Mr Khotkar were both senior executives of PAG Asia Capital, which provided Rex with up to $150m in convertible notes to finance the 737 operations.

Mr Khotkar resigned from the board in April, to spend more time to focus on PAG’s private equity investment portfolio.

Two weeks later Mr Pan initiated meetings with EY to conduct a review of Rex’s finances as the 737 operation continued to lose money at a rate of $1m a week.