Supreme Court Sets Aside NCLT Judgment For Using AI-Hallucinated Citations

In a significant development, the Supreme Court on Thursday (July 2) has 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 "hallucinated" judicial precedents while deciding an insolvency dispute. To address the growing challenges posed by AI in legal practice, a bench of Justice PS Narasimha and Justice Alok Aradhe directed the Bar Council of India to constitute a committee of experts to examine the issues arising from the use of artificial intelligence in adjudication. "We have therefore directed the Bar Council of India also to constitute a committee and examine these issues in detail.", the Court said. The Bar Council must take up this issue with utmost seriousness, deliberate earnestly, and prescribe a guiding principle to prevent such occurrences, along with the disciplinary action that will follow a violation of the norms.The Court held that while AI can be used to assist adjudication, it can never replace human reasoning, stressing that adjudication must remain under "total and absolute control" of humans at every stage. .ad_unit_wrapper { text-align: center; margin-top: 10px; } .insidecontent-ad-img { width: 728px; height: 220px; max-width: 100%; object-fit: cover; display: block; margin: 0 auto; } @media only screen and (max-width: 768px) { .insidecontent-ad-img { width: 100%; height: auto; } } "There is again a case where the tribunal relied on non-existing fake and hallucinated material generated through artificial intelligence as if they were precedents in support of its judgment. For the reasons to follow, we have set aside the judgment of NCLT as well as the judgment in appeal to affirm and maintain the integrity of the adjudication and its processes.", the Court observed. The Court added that beyond setting aside the impugned orders, the case presented an opportunity to define the judiciary's approach towards artificial intelligence. "More than the inevitable consequence of setting aside such judgment, what is significant for our decision making is our resolve to adopt artificial intelligence technology in aid of adjudication while at the same time asserting and declaring total and absolute control over adjudications with a human in the loop at every stage.", the Court said. Background The appeal arose from insolvency proceedings initiated by Jammu and Kashmir Bank Ltd. under Section 7 of the Insolvency and Bankruptcy Code against Essel Infraprojects Ltd. (EIL), which had executed a corporate guarantee in respect of credit facilities extended to Pan India Utilities Distribution Company Ltd. The NCLT, Mumbai, admitted the insolvency application on August 28, 2024, recording a default of ₹87.43 crore. The NCLAT subsequently affirmed the admission order on September 11, 2025. Before the Supreme Court, Senior Advocate Madhavi Divan, appearing for the suspended director of the corporate debtor, Pooja Ramesh Singh, contended that the tribunals had relied upon six judicial decisions that either did not exist or failed to support the legal propositions attributed to them. The impugned orders referred to purported precedents including State Bank of India v. Shree Ram Urban Infrastructure, 2020 SCC OnLIne SC 341, Everest Kento Cylinders v. Union of India, (2015) 2 SCC 1 and ICICI Bank v. Urban Infrastructure Real Estate, (2019) 16 SCC 528. An affidavit placed before the Court confirmed that these authorities could not be traced in any recognised legal database, exposing them as fabricated or "hallucinated" AI-generated citations. The counsel appearing for the respondent no.1 filed an affidavit stating that these judgments were not cited at the bar and were relied upon by the NCLT on its own.The Supreme Court held that judicial decisions founded upon non-existent precedents cannot be sustained and accordingly set aside the orders of both the NCLT and the NCLAT. AI Hallucinations Compared to 'Methyl Isocyanide' in Law The strongest observation of the judgment was about the comparison of the phenomenon of AI hallucinations. The Bench observed that one of the defining characteristics of current AI systems is "a tendency to generate non-existent fake and hallucinated results" while responding to prompts. "We are neither concerned with the cause nor the process of resolving such hallucination. It is for the engineers and scientists to deal with them.", the Court said, stressing that the legal system cannot tolerate the use of fabricated AI-generated material in judicial reasoning. "For us, that is, for those who are in the province of adjudication and determination of disputes, this by-product of AI, that is the production of fake, non-existing and hallucinated material and its utilization as precedence in law, is like the release of methyl...