QUESTION

Mr Salomon, a successful businessman, owns a company Salomon and Co Ltd. He decides that his daughters, Lusitania, and Jane, need something to occupy their time. Lusitania tells Mr Salomon that she is interested in fine art. Mr Salomon therefore incorporates a company, Exotic Art Ltd. The company is a wholly owned subsidiary of Salomon and Co.

Lusitania and Jane are both appointed directors on incorporation. The third director is Donald, Mr Salomon’s accountant. He is a highly experienced accountant. Having just left high school, neither Lusitania nor Jane has any business experience. Lusitania did however get top of her class in 5th form Art. Exotic Art is financed by $500,000 from Salomon and Co for the issue of the shares. A bank has also agreed to provide a $500,000 overdraft facility to be drawn down when required. At the first directors’ meeting it is agreed that Donald will take over the day-to-day running of Exotic Art, and be responsible for finance. Lusitania will be in charge of buying and selling art, while Jane is given no responsibilities.

Shortly after incorporation, Lusitania and Jane, while having lunch in Ponsonby, visit an art gallery. The gallery is having an exhibition of Bolivian rain art. Lusitania is so entranced that she decides to spend $500,000 of Exotic Art’s money on three sculptures. Jane is concerned, and thinks they should get expert advice. Lusitania however reassures Jane by telling her that she wrote an essay on South American art in her 5th form class, which earned a