Supreme Court Sets Aside NCLT and NCLAT Judgments

The Supreme Court, comprising Justice PS Narasimha and Justice Alok Aradhe, set aside the judgment of the National Company Law Tribunal, Mumbai, and the subsequent appellate order of the National Company Law Appellate Tribunal. The Court held that the tribunals had based their decisions on six judicial decisions that either did not exist or did not support the legal propositions attributed to them. The bench observed that the use of such non‑existent, AI‑hallucinated material in judicial reasoning cannot be sustained and therefore the impugned orders must be vacated.

The Court emphasized that while artificial intelligence may be employed as an aid to adjudication, it can never replace human reasoning. It stressed that adjudication must remain under total and absolute control of humans at every stage, with a human in the loop throughout the process.

Background of the Insolvency Dispute

The dispute originated from insolvency proceedings initiated by Jammu and Kashmir Bank Ltd under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Essel Infraprojects Ltd. The bank alleged a default arising from a corporate guarantee executed by Essel Infraprojects Ltd in respect of credit facilities extended to Pan India Utilities Distribution Company Ltd. The National Company Law Tribunal, Mumbai, admitted the insolvency application on 28 August 2024, recording a default of Rs 87.43 crore. The National Company Law Appellate Tribunal affirmed the admission order on 11 September 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 were either non‑existent or did not support the legal propositions attributed to them. The impugned orders cited the following purported precedents: 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.

Court’s Observations on AI Hallucinations

The Bench described the tendency of current AI systems to generate non‑existent fake and hallucinated results as a defining characteristic. It stated that the cause and process of resolving such hallucinations are matters for engineers and scientists, but the legal system cannot tolerate the use of fabricated AI‑generated material in judicial reasoning. The Court likened the phenomenon to the release of methyl isocyanide in the province of law and justice, describing it as invisibly insidious and catastrophic by the time anyone notices.

The Court further observed that, beyond setting aside the impugned orders, the case presented an opportunity to define the judiciary’s approach towards artificial intelligence. It expressed a resolve to adopt AI technology in aid of adjudication while asserting and declaring total and absolute control over adjudications with a human in the loop at every stage.

Direction to the Bar Council of India

To address the growing challenges posed by AI in legal practice, the Supreme Court 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. The Court said that it had therefore directed the Bar Council of India also to constitute a committee and examine these issues in detail.

Operative Outcome

Accepting the submission of the counsel for the suspended director, the Supreme Court held that judicial decisions founded upon non‑existent precedents cannot be sustained. Accordingly, it set aside the orders of both the National Company Law Tribunal and the National Company Law Appellate Tribunal. The judgment underscores the necessity of maintaining human oversight in judicial processes, even as technological tools are increasingly integrated into legal work.