After being “optimistic” about recording a profit while losing millions of dollars monthly, directors at troubled airline Rex failed to reveal an expected $35 million shortfall until days before the financial year ended, a regulator alleges.
The federal government had been briefed on an investigation into what prior investors were told, before extending an $80 million lifeline to keep vital regional services operating.
Following the investigation, the Australian Securities and Investments Commission is attempting to have four directors disqualified over alleged corporate governance failures.
“They failed to discharge their duties to ensure that the market was properly informed,” commission chair Joe Longo told reporters on Wednesday.
The airline and four directors have been sued in the NSW Supreme Court for allegedly failing to provide accurate and timely information to the market, contravening continuous disclosure obligations.
The regulator is seeking declarations, pecuniary penalties and disqualification orders against Lim Kim Hai, John Sharp, Lincoln Pan and Siddharth Khotkar.
The court will need to grant the regulator leave to sue the airline because it is in administration.
An earlier breach of disclosure obligations, relating to the expansion from regional services into domestic operations that eventually forced Rex into administration, led to a $66,000 fine in 2021.
Businesses owed about $500 million across five groups in the organisation when consultancy firm EY was appointed as administrators in July, with its shares suspended from trade.
The airline’s administrators said it would be inappropriate to comment because the matter is before court.
Rex told the market it was optimistic about the company making a full-year profit in February 2023 barring further external shocks, a representation without reasonable grounds, the regulator said.
Then-executive chair Mr Lim allegedly contravened his duties by authorising the announcement and failing to correct it until 10 days before the financial year’s end, when the market learned a loss of $35 million was expected for 2022/23.
The company blamed a “global shortage of pilots and engineers, along with supply chain shocks post-COVID” for disruptions that forced significant reductions in scheduled flights.
The three other accused directors allegedly knew by mid-April 2023 the airline was unlikely to record a profit and contravened their duties by not taking steps to update the market.
Revised interim guidance in June 2023 said the airline remained optimistic about a pre-tax profit for the next financial year “and beyond” thanks to expanded domestic jet operations and new contracts.
Nominally a regional carrier, the airline made an aggressive push to compete on key capital-city routes against industry heavyweights Qantas and Virgin in 2021.
It has struggled financially since, reporting a bottom-line net loss of $3.2 million for the first half of the 2023/24 financial year.
Its expansion included competing on Sydney-to-Melbourne flights, one of the busiest routes in the world.
The consumer watchdog found average fares on city routes increased 13 per cent in two months after Rex stopped those services.
Administrators are yet to find a buyer and at least 600 workers have been made redundant.
The Transport Workers Union said the alleged contraventions create more uncertainty about the airline’s future and further necessitate the government taking an equity stake.
“It is crystal clear we cannot let Rex fail,” national secretary Michael Kaine said.
Formed in 2002, Rex is Australia’s largest independent regional airline and makes about 1050 flights a week on 45 routes.
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