Corporate Veil And AI Legal Personhood - A Threat To Accountability In Indian Company Law

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T19:01:48.385Z

Updated: 2026-08-30T07:08:18.004Z

CORPORATE VEIL AND AI LEGAL PERSONHOOD: A

THREAT TO ACCOUNTABILITY IN INDIAN COMPANY LAW

Harshita Gupta, O.P Jindal Global University

ABSTRACT

As artificial intelligence (AI) becomes increasingly autonomous, the question of whether AI should be granted legal personhood has sparked intense debate. While this notion may appear innovative, this paper argues that granting AI legal personhood would severely undermine corporate accountability in India, particularly under the well-established doctrine of the corporate veil. The corporate veil, protected under the Companies Act, 2013, shields shareholders from personal liability but is pierced when fraud or wrongdoing is involved. Granting AI personhood would effectively allow corporations to shift blame to AI systems, diluting the liability of directors and shareholders and complicating the pursuit of justice.

The paper meticulously examines the doctrine of the corporate veil in India and its interaction with AI personhood, exploring how such a development would conflict with both statutory provisions and judicial precedents. Through an analysis of landmark cases like State of Rajasthan v. Gotan Limestone Khanij Udyog Pvt. Ltd. , this paper demonstrates how courts have consistently worked to prevent the misuse of corporate structures. Furthermore, the paper engages in a comparative analysis with the United States, European Union, and Singapore, each of which has adopted frameworks to strengthen corporate responsibility for AI systems without granting them legal personhood. By juxtaposing the established principles of corporate liability with the potential dangers of AI legal personhood, this paper argues that India must resist this shift.

Instead, the focus should remain on ensuring robust oversight and accountability for AI-driven decisions within existing corporate governance structures.

I.

Introduction

Law is meant to grow and evolve with time, adapting to the needs of society while maintaining core principles of justice and accountability. With artificial intelligence (AI) emerging as an integral part of our future, the question arises: should AI be incorporated into legal frameworks and granted legal personhood? As its autonomy grows, so too does the potential for legal complications. 1 One pressing issue is determining who should be held accountable for actions taken by AI. Some argue that granting legal personhood to AI could address these challenges, enabling the legal system to accommodate this revolutionary technology. 2 While many scholars argue in favour of this idea, my stance in this paper is the opposite. Specifically, in the context of India, I argue that granting AI legal personhood would be detrimental.

It would effectively outsource liability away from the corporations that develop and use AI, undermining the principles that Indian law has established through the doctrine of piercing the corporate veil. India’s legal system, through legislative measures and judicial decisions, has worked to ensure that corporations cannot use their separate legal status to escape responsibility. By lifting the corporate veil in cases of fraud and misrepresentation, Indian courts have upheld accountability. 3 Granting legal personhood to AI would directly conflict with this well-settled principle, shifting blame to AI entities and reducing corporate liability. This paper will also analyse how other jurisdictions approach the issue of AI personhood and accountability to offer a comparative perspective.

The paper will first explore the concept of the corporate veil in Indian law, followed by an examination of the implications of granting legal personhood to AI. I will then analyse how this development would conflict with the goals of piercing the corporate veil and discuss potential alternatives by examining other jurisdictions. Ultimately, I will argue that while legal frameworks must evolve with technological advancements, granting legal personhood to AI is not the solution, as it would erode corporate liability rather than strengthen it. II.

The Doctrine of corporate veil Different forms of businesses—such as sole proprietorships, partnerships, and companies— offer distinct advantages and disadvantages. Sole proprietorships provide full control to the 1 Ben Chester Cheong, Granting Legal Personhood to Artificial Intelligence Systems and Traditional Veil- Piercing Concepts to Impose Liability, 1 SN Soc. Sci. 231 (2021). 2 Shubham Singh, Attribution of Legal Personhood to Artificially Intelligent Beings, Bharati L. Rev., July-Sept. 2017, at 194.

3 Nadia Banteka, Artificially Intelligent Persons, 58 Hous. L. Rev. 537 (2021).

owner but expose personal assets to business liabilities. Partnerships distribute control and resources among partners but come with the risk of shared liability for each partner's actions. In contrast, a company's most significant advantage, as enshrined in the Companies Act, 20134, is its status as a separate legal entity from its shareholders and workers. This concept, known as the corporate veil, provides crucial protections by shielding members from personal liability for the company’s debts and obligations. 5 The doctrine of corporate veil is the legal recognition of a company as an independent entity, distinct from its shareholders. This principle was famously established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897)6. In this case, Mr. Salomon transferred his business to a newly formed company, fully owned by his family.

When the company became insolvent, creditors argued that Salomon was personally liable for the debts since the company was merely an extension of his personal business. However, the House of Lords ruled that the company was a separate legal entity, and Salomon was not liable for its debts beyond his shareholding. This case laid the foundation for the corporate veil, ensuring that shareholders are protected from personal liability beyond their investment in the company. In Indian law, this principle is enshrined in Section 34(2) of the Companies Act, 20137, which provides that upon incorporation, a company becomes a separate legal entity capable of exercising all functions of an incorporated body, including owning property, entering contracts, and incurring liabilities.

Section 9 further reinforces the distinction between the company and its members by limiting their liability to the unpaid value of their shares8. These provisions underscore the autonomy and independence of a company from its shareholders, directors, and employees. Another key case, Lee v. Lee's Air Farming Ltd. (1960)9, further solidified the doctrine of corporate personality by holding that an individual could simultaneously be a controlling shareholder, director, and employee of a company. The Privy Council ruled that the company was distinct from its owner, allowing Lee’s widow to claim compensation for his death in a workplace accident, as he was considered a separate employee of the company. Similarly, in Bacha F. Guzdar v. Commissioner of Income Tax (1955)10, the Indian Supreme Court

4 Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).

5 Arjya B. Majumdar, Corporate Personality in India, SSRN (2013), http://ssrn.com/abstract=2256140.

6 Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.).

7 Companies Act, 2013, § 34(2) (India).

8 Companies Act, 2013, § 9 (India).

9 Lee v. Lee's Air Farming Ltd., [1961] 3 All E.R. 420 (P.C.).

10 Bacha F. Guzdar v. Commissioner of Income Tax, AIR 1955 SC 74.

reaffirmed that shareholders are not co-owners of the company’s property and have no claim to its assets, reinforcing the separation between the company and its members. Despite the strong protections offered by the corporate veil, O. Kahn-Freund, in his 1944 critique, raised significant concerns about the misuse of the corporate veil. 11 First, he argued that the doctrine could be exploited by individuals to evade personal responsibility, allowing shareholders and directors to hide behind the corporate structure to avoid liability for their wrongful actions. Second, he emphasized that the separation between a company and its members could be used to defraud creditors and evade legal obligations, as individuals could manipulate the corporate form to insulate themselves from financial consequences.

Third, he was concerned that this legal fiction allowed companies to act in ways that harmed public interest, with the corporate veil shielding those who directed such actions from accountability. Fourth, he argued that this mechanism could undermine fairness, as third parties, such as creditors or employees, often had no recourse against the individuals truly responsible for the company’s actions. Finally, Kahn-Freund believed that unchecked reliance on the corporate veil weakened the integrity of the legal system, as it created opportunities for individuals to misuse corporate structures to escape legal scrutiny. His critique called for a more cautious application of the corporate veil, advocating for its removal in cases of fraud or abuse to uphold justice. III.

Piercing of corporate veil in India The doctrine of piercing the corporate veil is a legal mechanism that allows courts to disregard a company's separate legal personality and hold its shareholders or directors personally liable for the company’s obligations. Although the corporate veil generally protects individuals from personal liability, there are circumstances where this protection is lifted. These instances are rooted both in statutory provisions and judicial precedents. A. Statutory provisions Under the Companies Act, 2013 outline specific instances where the corporate veil can be pierced. For example, Section 3A provides for the lifting of the veil in situations where the number of members of a company falls below the minimum required, and business continues beyond six months.

12 In such cases, the remaining members may be held personally liable for the debts incurred during this period. Similarly, Section 7(2) allows the veil to be lifted if false

11 O. Kahn-Freund, Some Reflections on Company Law Reform, 7 Mod. L. Rev. 54 (1944).

12 Companies Act, 2013, § 3A (India).

statements are made during the incorporation process. 13 Directors or individuals making fraudulent representations during incorporation may be personally liable for any damages caused. Further, Sections 34 and S. 35 impose liability on directors or other individuals involved in fraudulent prospectuses, making them accountable to those who suffer losses because of deceitful information. 14 This statutory intervention ensures that individuals cannot use the corporate form to mislead investors or creditors. Section 39(3) imposes liability on individuals involved in fraudulent allotments of shares, extending personal responsibility to directors or promoters engaged in such actions. 15 Moreover, Sections 73 and S. 76, which pertain to the acceptance of deposits, hold company directors personally accountable if they accept deposits in contravention of the law16.

Section 21617, dealing with investigations into a company's affairs, and Section 33918, which addresses fraudulent conduct of business in winding-up proceedings, both allow for piercing the veil when fraud or malfeasance is detected. B. Judicial precedents They have further refined the circumstances under which the corporate veil can be lifted. In LIC v. Escorts Ltd. (1986)19, the Supreme Court of India recognized that while the corporate veil is a fundamental principle of corporate law, it could be lifted in cases where the corporate entity is used for fraudulent or improper purposes. The Court emphasized that piercing the veil is permissible when the company is a mere facade for individuals seeking to evade their legal obligations. The decision established that courts should look at the substance of transactions and relationships rather than just the legal form.

Another landmark case, Dishaw Maneckjee Petit v. Wadia (1901)20, demonstrated the courts' willingness to lift the veil when a company is merely a front for its controllers. In this case, the court held that a company set up to shield individuals from liability while engaging in

13 Companies Act, 2013, § 7(2)(India).

14 Companies Act, 2013, § 34 and § 35 (India).

15 Companies Act, 2013, § 39(3) (India).

16 Companies Act, 2013, § 73 and § 76 (India).

17 Companies Act, 2013, § 216 (India).

18 Companies Act, 2013, § 339 (India).

19 Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 S.C.C. 264.

20 In re Dishaw Maneckjee Petit, AIR 1972 Bom 371.

fraudulent or unethical behaviour could not rely on the doctrine of separate legal personality to escape accountability. Essentially this doctrine illuminates that when the corporate form is used as a shield for improper or fraudulent actions, both statutes and courts in India have intervened, demonstrating that the corporate veil is not absolute. IV.

Concept of Legal Personhood for AI Legal personhood traditionally refers to the capacity of an entity to have rights and obligations under the law, typically attributed to human beings or legal entities such as corporations. If AI were granted legal personhood, it would fundamentally change how we assign rights and obligations to non-human entities. 21 Like corporations, AI could potentially enter into contracts, own property, and be held accountable for its actions in legal proceedings. This would establish AI as a separate legal entity, distinct from the companies or individuals who develop or deploy it. 22 Practically, this means AI could be directly responsible for decisions it makes autonomously, such as making financial transactions or even causing harm. Developers and users might avoid liability by arguing that the AI acted independently.

This legal recognition could offer clarity in cases where assigning human responsibility is difficult due to AI’s autonomous nature23. While this may have its pros, it is crucial to examine the impact such a shift would have on a society like India. The legal framework, business practices, and the evolving relationship between technology and the economy in India could be profoundly affected by AI personhood24. This raises questions about regulatory oversight, accountability, and how such changes might shape the balance between technological innovation and societal interests. V.

Impact of Granting Legal Personhood to AI on Corporate Veil The concept of granting legal personhood to AI could fundamentally alter the existing doctrines of corporate liability, particularly the corporate veil. This section explores two key issues: first, whether AI personhood would align with or conflict with the Companies Act’s goals, and second, whether treating AI as a separate legal entity akin to a subsidiary could lead to

21 Mihailis E. Diamantis, Vicarious Liability for AI, 99 Ind. L.J. 317 (2023).

22 Claudio Novelli, Giorgio Bongiovanni & Giovanni Sartor, A Conceptual Framework for Legal Personality and Its Application to AI, 13 Jurisprudence 194 (2022).

23 Nadia Banteka, Artificially Intelligent Persons, 58 Hous. L. Rev. 537 (2021).

24 Alicia Lai, Artificial Intelligence, LLC

Corporate Personhood as Tort Reform, 2021 Mich. St. L. Rev. 597. complexities in assigning corporate liability. These two parts will highlight how legal personhood for AI could undermine the core principles of corporate governance in India. A. Would it be permitted as per the Companies Act, 2013 One of the foremost issues with granting legal personhood to AI is the risk of companies outsourcing their liability to AI systems, thereby undermining the objectives of Indian company law, particularly under the Companies Act, 201325. The corporate veil doctrine, as codified under this Act, aims to ensure that directors and shareholders remain accountable for the company's actions. Courts have repeatedly emphasized the need to pierce the corporate veil when fraud or wrongdoing is committed under the guise of corporate structure, as seen in State of Rajasthan v. Gotan Limestone Khanij Udyog Pvt.

Ltd. 26, where the court disregarded the corporate veil to expose malfeasance. Granting AI personhood may allow companies to distance themselves from liability by attributing wrongful actions to the AI, which would act as a scapegoat. Such a shift would dilute the accountability measures carefully built into the Companies Act, specifically Section

3427 and Section 14728, which hold directors responsible for misstatements in the prospectus

and other actions made in bad faith. The Act aims to prevent companies from abusing legal frameworks, and AI personhood could disrupt this balance by introducing a separate entity for companies to hide behind. Additionally, there could be dire concerns over accountability gaps, particularly in high-risk sectors such as finance and healthcare, where companies could use AI to execute decisions without facing the consequences of poor outcomes. 29 For example, if an AI system makes a negligent decision, attributing fault to the AI itself would complicate liability assignment. Such an approach is contrary to the rationale behind provisions such as Sections 44730 and 44831 of the Companies Act, which aim to prevent fraud and misrepresentation.

By allowing AI to act as an independent legal entity, companies could argue that they are not responsible for the AI’s autonomous decisions, effectively dodging liability.

25 Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).

26 State of Rajasthan v. Gotan Limestone Khanij Udyog Pvt. Ltd., (2002) 6 SCC 469.

27 Companies Act, 2013, § 34(India).

28 Companies Act, 2013, § 147 (India).

29 Simon Chesterman, Artificial Intelligence and the Limits of Legal Personality, 69 Int’l & Comp. L.Q. 819 (2020).

30 Companies Act, 2013, § 447 (India).

31 Companies Act, 2013, § 448 (India).

B. A Hypothetical Exploration by viewing AI to be a subsidiary Even if we humour the argument that AI’s legal personhood will not undermine corporate liability, it will closely resemble the relationship between a holding company and its subsidiary under Sections 2(46)32 and Section 2(87)33 of the Companies Act, 2013. A holding company controls its subsidiary but maintains legal separation, limiting its liability to the subsidiary’s actions. This framework can help draw a parallel with AI, wherein a company could control the AI’s operations while maintaining that the AI is a distinct legal entity. To fully understand the impact of this parallel, it is essential to examine how Indian courts have treated such relationships between holding companies and subsidiaries.

This analysis will shed light on how similar principles might apply if AI were to be granted legal personhood and treated as a separate but controlled entity. In Vodafone International Holdings v. Union of India34, the Supreme Court scrutinized the relationship between Vodafone and its subsidiaries to determine the extent of control and liability. Here the court highlighted the complexities involved in distinguishing between real control and legal separation. If AI were treated similarly to a subsidiary, companies could use AI to conduct risky or controversial actions, arguing that the AI, like a subsidiary, acted independently. This could add a layer of complexity to liability determinations, as seen in Small Industries Development Bank of India v. Creation Investments Equitas Holdings LLC35, where the court examined control issues in subsidiary structures.

However, even in cases involving subsidiaries, courts have often pierced the corporate veil when they detect fraud or misuse of the corporate structure. The precedent established in Gotan Limestone makes it clear that Indian courts would not hesitate to look beyond AI’s legal personhood if it were used as a tool to perpetrate fraud. The Companies Act’s provisions, particularly those related to fraudulent actions, would likely come into play to ensure that companies do not escape liability simply by blaming their AI systems. So, to simply put it — the analogy to holding and subsidiary companies suggests that while AI could be granted legal personhood, the courts would still examine the relationship between the AI and the company controlling it. Directors could be held accountable if it is found that they

32 Companies Act, 2013, § 2(46) (India).

33 Companies Act, 2013, § 2(87) (India).

34 Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613.

35 Small Industries Dev. Bank of India v. Creation Invs. Equitas Holdings LLC, (2020) 3 SCC 80.

used AI to achieve outcomes that would otherwise violate corporate laws, much like how parent companies can be held liable for the actions of their subsidiaries under Indian law. In conclusion, granting legal personhood to AI would undermine the accountability mechanisms established by the Companies Act, 2013, allowing companies to shift responsibility for decisions onto AI systems. While proponents claim that AI personhood could address accountability gaps, the risks—particularly in complicating liability—far outweigh the benefits. Courts may still pierce the corporate veil to hold companies accountable, but this would add unnecessary complexity to corporate governance.

Indian law prioritizes transparency and accountability, and instead of granting AI legal personhood, the focus should remain on ensuring corporate responsibility for AI-driven decisions without introducing legal separation. VI.

A comparative Analysis and possible solutions As the debate over granting legal personhood to AI unfolds globally, different jurisdictions have adopted varying approaches to AI regulation and corporate liability. While some regions focus on enhancing corporate accountability and managing AI risks, others have initiated frameworks to address ethical and legal challenges posed by AI.

1. United States

In the United States, the concept of AI legal personhood has not been formally recognized, but debates around AI accountability have gained traction. Legal scholars like Danielle Citron and Frank Pasquale have argued for increased AI accountability, emphasizing that companies should be held liable for the actions of their AI systems. They suggest a “system of accountability” where both creators and users of AI systems are responsible for ensuring transparency and compliance with ethical standards.36 AI legal personhood in the U.S. could pose significant risks to corporate liability, as companies may attempt to shift responsibility for wrongful AI decisions onto the system itself, reducing corporate accountability. The lack of clear legal frameworks surrounding AI accountability could exacerbate these risks, complicating liability assignment.

2. European Union

The European Union (EU) has taken a proactive stance on AI regulation with the proposed AI 36 Migle Laukyte, AI as a Legal Person, Proceedings of the International Conference on Artificial Intelligence and Law(ACM 2019).

Act, which aims to establish a comprehensive regulatory framework for AI systems.37 The draft AI Act focuses on ensuring that AI developers, deployers, and users are accountable for AIrelated risks. Notably, the EU has not endorsed AI legal personhood but has instead sought to clarify corporate responsibility for AI systems. The draft AI Act categorizes AI systems based on their risk levels, assigning different levels of corporate liability for AI actions. This approach highlights the EU’s emphasis on human oversight and corporate responsibility, rather than separating AI as an independent legal entity. The framework ensures that companies cannot evade liability for harmful AI actions by clearly defining who is responsible at each stage of AI development and deployment.

3. Singapore

Singapore offers a unique regulatory perspective by combining technological innovation with stringent corporate responsibility frameworks. The country’s Model Artificial Intelligence Governance Framework provides guidelines for companies to ensure ethical use of AI while promoting transparency, fairness, and accountability. 38 Although Singapore does not recognize AI legal personhood, its regulatory approach prioritizes corporate responsibility, ensuring that companies are accountable for AI systems they develop or deploy. The framework also emphasizes the importance of risk management and human oversight in AI decision-making processes. Therefore, from the experiences of the U. S. , EU, and Singapore, it is clear that AI legal personhood is not widely endorsed. Instead, these jurisdictions focus on reinforcing corporate accountability and human oversight in AI operations.

India can draw from these regulatory frameworks by adopting stringent guidelines to ensure companies remain liable for AI-driven decisions, without resorting to granting AI separate legal personhood. Emphasizing transparency, risk management, and corporate responsibility can help mitigate potential liability gaps and maintain robust governance standards. VII.

Conclusion

Granting legal personhood to AI poses significant risks to the accountability structures established under Indian company law. The doctrine of corporate veil and its piercing, as enshrined in the Companies Act, 2013, ensures that directors and shareholders cannot evade 37 Claudio Novelli, Giorgio Bongiovanni & Giovanni Sartor, A Conceptual Framework for Legal Personality and Its Application to AI, 13 Jurisprudence 194 (2022). 38 Ben Chester Cheong, Granting Legal Personhood to Artificial Intelligence Systems and Traditional Veil- Piercing Concepts to Impose Liability, 1 SN Soc. Sci. 231 (2021). responsibility for corporate misconduct. Introducing AI as a separate legal entity would allow companies to deflect liability onto AI systems, thereby diluting corporate accountability.

While proponents argue that AI legal personhood can bridge accountability gaps, the complexities it introduces—especially in the context of corporate governance—are counterproductive. Comparative analyses of the U. S. , EU, and Singapore demonstrate that the focus should remain on enhancing corporate oversight and liability for AI-driven actions, rather than separating AI from its developers and users. To maintain robust corporate governance in India, it is imperative to prioritize transparency, risk management, and regulatory oversight, ensuring that technological advancements like AI do not erode the principles of accountability that are vital to the legal system. Granting AI legal personhood is not the solution, and India should instead strengthen existing frameworks to address the challenges posed by AI in business operations.