SC Sets Aside NCLT, NCLAT Orders Over AI-Hallucinated Precedents; Directs BCI To Form Panel

New Delhi, Jul 3 (KNN) The Supreme Court on Thursday set aside orders passed by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) after finding that both forums had relied on non-existent, AI-generated judicial precedents while deciding an insolvency dispute — marking one of the most significant judicial interventions on the use of artificial intelligence in legal proceedings in India.

A bench of Justices PS Narasimha and Alok Aradhe held that judicial decisions founded on fabricated precedents cannot be sustained and declared a zero-tolerance approach for the citation or use of unverified AI-generated material in adjudication. 

The court directed the Bar Council of India (BCI) to constitute a committee of experts to examine issues arising from the use of AI in legal proceedings.

Background

The case stems from insolvency proceedings initiated by Jammu and Kashmir Bank under the Insolvency and Bankruptcy Code (IBC) against Essel Infraprojects Limited, a guarantor for loans to Pan India Utilities Distribution Company. The NCLT admitted the plea in August 2024, with the NCLAT upholding it in September 2025.

Appearing for the appellant, Senior Advocate Madhavi Divan argued before the Supreme Court that six rulings cited by the tribunals were either non-existent or irrelevant, with affidavits confirming they were untraceable and not cited by parties.

Court's Observations

The bench described AI hallucination — the tendency of AI systems to generate non-existent or fabricated results — as invisibly insidious and catastrophic by the time anyone notices, comparing it to the release of a toxic substance in the province of law and justice.

The court held that an advocate commits professional misconduct by citing AI-generated judgments without first verifying their authenticity, and that it would be an equally serious lapse if a judge were to rely on such material. 

It declared that any decision founded on fake or hallucinated AI-generated precedents would be no decision in the eyes of law, liable to be set aside even if only a trace of such material had entered the decision-making process.

The court was equally clear that its ruling was not intended to restrict the lawful use of AI in legal practice, but specifically addressed the presentation or reliance on fabricated material as if it were genuine court precedent. 

It stressed that adjudication must remain under total and absolute control of humans at every stage, and that AI can assist but never replace human reasoning.

The matter has been remanded to the NCLT for fresh consideration, uninfluenced by the hallucinated citations. 

The Supreme Court had previously taken cognisance of the issue of AI-generated fake citations in an earlier matter before the same bench, and last month published draft guidelines on the use of AI in legal proceedings, inviting feedback from the bar.

(KNN Bureau)