SC Flags AI ‘Hallucinations’; Quashes NCLT, NCLAT Orders

New Delhi (IANS): 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 discovering that the NCLT relied on fake, “hallucinated” judicial precedents generated by Artificial Intelligence (AI). Declaring a policy of “zero tolerance” toward such practices, the apex court ruled that any decision based on fabricated AI material subverts the rule of law and holds no legal validity.

A Bench of Justices P.S. Narasimha and Alok Aradhe restored the insolvency proceedings to the NCLT for fresh adjudication, ordering a new decision within two weeks.

“This is yet again a case where the Tribunal relied on non-existent, fake and hallucinated material, generated through Artificial Intelligence (AI), as if it were a precedent in support of its judgment,” the apex court observed.

‘Catastrophic’ Impact on Justice

Stressing that AI must only assist and not replace human reasoning, the Justice Narasimha-led Bench quashed the NCLT’s August 28, 2024 order and the NCLAT’s September 11, 2025 judgment.

The apex court issued a stark warning against the unverified use of technology in legal processes:

“For us… this by-product of AI, i.e., the production of fake, non-existent, and hallucinated material and its utilisation as precedents in law, is like the release of methyl isocyanate in the province of law and justice: Invisible, insidious, and catastrophic by the time anyone notices. It not only contaminates but takes away the very lifeblood of judicial determination.”

The Bench ruled that any judicial decision is completely vitiated if even an “iota of fake or hallucinated material” enters the decision-making process.

Case Background

The landmark judgment stems from an appeal filed by Pooja Ramesh Singh, the suspended director of Essel Infraprojects Ltd. Singh moved the apex court to contest insolvency proceedings initiated against the company by Jammu and Kashmir Bank Ltd. under Section 7 of the Insolvency and Bankruptcy Code.

During the arguments:

• Senior advocate Madhavi Divan, representing the appellant, revealed that several judgments in the NCLT order did not exist or contained completely fabricated paragraphs falsely attributed to genuine Supreme Court decisions.
• The Supreme Court independently verified the citations and confirmed that the paragraphs were entirely untraceable to actual reported decisions.
• Jammu and Kashmir Bank filed an affidavit clarifying that its own counsel had not cited the fake cases, suggesting the tribunal relied on them through its own independent research.

Accountability for Judges and Lawyers

The Supreme Court drew a firm line on professional accountability, defining unverified AI usage as a serious lapse for both the bench and the bar.

• For Advocates: Citing unverified, AI-generated judgments constitutes professional misconduct.
• For Judges: Relying on fake or hallucinated AI material to support a judicial determination constitutes a serious institutional lapse.

Institutional Safeguards Ordered

To combat the rising threat of digital hallucinations in courtrooms, the Supreme Court directed the Bar Council of India (BCI) to set up a dedicated committee. The BCI must urgently deliberate on the issue, formulate guiding principles for lawyers, and outline strict disciplinary actions for future violations.

While restoring the insolvency application to the NCLT, the Supreme Court ordered all parties to maintain a status quo until the tribunal disposes of the dispute. The Bench clarified that it has expressed no opinion on the actual merits of the commercial case itself.