Author: Kaif Khan
College: Lloyd Law College, Greater Noida
LinkedIn: https://www.linkedin.com/in/kaif-khan-797126429/
Abstract
Supreme Court of India set aside the NCLT and NCLAT judgements, holding that decision based on AI GENERATED fake/ hallucinated material is no decision in the eyes of the law. The appellant, a suspended director of Essel Infraprojects Ltd., the corporate guarantor of Pan India utilities Distribution Company ltd., argued that liabilities and guarantee had been transferred by demergers and amalgamation. The NCLAT dismissed the appeal, relying on clause 8 of the guarantee deed and six judgements cited in paragraph 12, which the appellant proved were fake and non-existent. Court declared zero tolerance for citing or relying on unverified AI- generated proceedings, holding it misconduct by the advocate and a serious lapse by the judge, and directed the Bar Council of India to prescribe disciplinary action. The court restored the section 7 application for expeditious disposal within two weeks.
To the Point
This appeal, filed under Section 62 of the Insolvency and Bankruptcy Code, 2016, challenges the judgment of the National Company Law Appellate Tribunal (NCLAT) ) dated 11.09.2025, which upheld the National Company Law Tribunal’s (NCLT) decision dated 28.08.2024 to admit the bank’s Section 7 application against Essel Infraprojects Ltd., the corporate debtor and corporate guarantor. Upon admission, the NCLT appointed an Interim Resolution Professional, imposed a moratorium under Section 14, and suspended the appellant director.
The appellant argued that the corporate debtor’s liabilities had been transferred through demerger and amalgamation and that the corporate guarantee had consequently been relinquished. The NCLAT relied on Clause 8 of the guarantee deed and six judgments cited in paragraph 12. However, the appellant showed that these judgments were either wrongly cited or did not exist at all and appeared to be AI-generated material.
The Supreme Court took a strong view of this, holding that a decision based on fake or unverified legal authorities cannot stand. It stressed that lawyers must verify AI-generated material before relying on it and that judges must independently check the authorities placed before them.
Describing AI hallucinations as akin to methyl isocyanate in the field of law and justice, the Court emphasized the need for a “human in the loop.” It also directed the Bar Council of India to frame appropriate disciplinary measures and sent the Section 7 application back to the NCLT for fresh and expeditious consideration.
Legal Jargon used
The judgement involves several legal important concepts. Section 7 and section 62 of Insolvency and Bankruptcy code, 2016 (IBC) lets a lender file application to start an insolvency proceedings against a defaulting company, and sec 62, provision that allows an appeal from the NCLAT’s decision to the supreme court. The use of AI-generated/hallucinated material (content invented by AI that looks real but it’s fabricated) by a legal professional such as advocate or judge is ‘No decision in the eyes of the Law.’ (A ruling based on fake material has no legal value at all).And is a professional misconduct by an advocate (A lawyer’s breach of duty in citing fake judgements without verifying them) and a serious Lapse by a judge (A judge’s serious failure in relying on fake or Ai-generated materials). And it is a zero tolerance approach (The court will not accept any excuse for using unverified AI-generated citations).
Different terms have been used whose meanings are as follows:
Corporate debtor (Means, the company that owes money and is facing insolvency proceedings.)
Corporate guarantor (A company that promised to repay another company’s loan if the borrower defaults)
Financial creditor (A person or entity owed a financial debt, such as bank)
Suspended director (A director whose powers are put on hold once insolvency starts; the company is the run by a resolution professional)
Scheme of demerger (A restructuring in which a company’s business or liabilities are split off and transferred to another company)
Relinquishment of guarantee (giving up the guarantee)
Guarantee deed, clause 8 (The written guarantee agreement; clause 8 said the guarantee continues even if the company is absorbed or amalgamated)
Amalgamation (The merging of two or more companies into one)
Status quo (Keepings things as they are until further orders)
Methyl isocyanate in the field of law and justice (The Court’s metaphor: AI hallucination is like a poisonous gas in the legal system, extremely harmful)
The Proof
The Judgement is important for the framework it lays down rather than the result of insolvency dispute. It talks about the Supreme Court’s warning regarding the responsible use of Ai in courts and legal practice. It emphasizes that Ai generated material, including cases, proceedings etc. must be verified by a human before it can be relied upon in court, and that a decision founded on fake and hallucinated material is no decision in the eyes of the law. The judgment acts as a deterrent against the citation of unverified AI-generated authorities by advocates and against the reliance on such material by judges, which the Court held to constitute professional misconduct and a serious lapse respectively. The Bench invoked an example of UK’s Solicitor’s Regulation Authority licensing Garfield Law Limited (GLA), an AI-driven law firm subject to strict safeguards against hallucinated case law, to illustrate that regulated AI use is possible only when verification remains mandatory and non-delegable.
The Court held that:
• Citing or relying on Ai generated precedents without human verification is professional misconduct on the part of legal professional.
• A judge or tribunal members relying on such material, even unknowingly, commits a ‘’serious lapse.’’
• Any decision that relies even partly on fake or AI-generated material can be set aside because it affects the fairness and integrity of the judicial process.
• The Bar Council of India was directed to form a committee to create guidelines and disciplinary measures for advocates who submit AI-generated fake material before courts.
Case Laws
1. Anthony Malcolm Cork & Anor v. Mark Smith [2026] EWHC 1199 (Ch) (UK):
The judgment also cited an English High Court case where a junior lawyer unknowingly relied on a fabricated legal quotation generated by the firm’s AI tool. Although there was no deliberate dishonesty, the court criticised the firm, which later referred itself to the regulator. The Supreme Court highlighted the case as a reminder that AI errors can slip through even when professional safeguards are in place.
2. Anuradha Bhasin v. Union of India (2020): for contrast, on judicial caution with new technology
Although it dealt with internet shutdowns, the case highlights the importance of checks, review, and proportionality when technology is involved. The same principle is relevant to the responsible use of AI in courts.
3. The fabricated citations at issue in this case
It bears emphasis that the string of citations relied upon by the NCLT;
• State Bank of India v. Shree Ram Urban Infrastructure Ltd.
• Everest Kento Cylinders Ltd. v. Union of India
• ICICI Bank Ltd. v. Urban Infrastructure Real Estate Ltd
• Dempo & Co. Ltd. v. Reliance Communications Ltd
• Canara Bank v. N.G. Subbaraya Setty & Anr
• Sarbjit Singh v. Union Bank of India
These are not genuine precedent endorsed by the Supreme Court. They are, rather, the very hallucinated material whose use the Court condemned: some were wrongly cited against real judgments, others were entirely non-existent, and in every case the paragraph attributed to them could not be traced to any actual law report. Their inclusion here is only to record what was found fabricated, not to cite them as authority.
Conclusion
The Supreme Court’s decision in this matter does two things simultaneously. First, on the narrow facts, it sets aside the NCLT’s admission order and the NCLAT’s confirming judgment because they rested, even partially, on citations and paragraphs that were never real, restoring the Section 7 application for fresh and expeditious disposal without any view being expressed on its merits. Second, and more consequentially, it establishes a binding institutional standard: AI may assist legal research and drafting, but it cannot be permitted to silently become the source of legal authority. Verification of every citation remains a non-delegable professional duty for advocates and a non-delegable judicial duty for adjudicators. The Bar Council of India has been tasked with translating this standard into enforceable rules, and the judgment signals that future lapses of this kind will attract disciplinary consequences rather than mere judicial disapproval.
The Bench reasoning also carried a normative dimension distinct from the strictly legal holding. It states that relying too much on AI for legal research and reasoning narrows down the independent judgement that lawyers and judges must exercise. AI may seem helpful, but if its output is not checked, small errors can quietly grow into bigger problems.
FAQs
1. Why were the NCLT and NCLAT orders set aside?
The orders were set aside because they relied upon an Ai generated, hallucinated preceding that turned out to be fabricated which were never verified by any legal professional.
2. Does this mean Ai cannot be used in litigation or adjudication at all?
No, Supreme Court held that the Ai can be a useful tool for legal research, drafting and improving efficiency. However, any information generated by Ai must be verified by a human before representing the same in any legal argument or court proceeding.
3. What happens to the underlying insolvency case now?
The insolvency proceedings have been sent back to the NCLT, which must reconsider the Section 7 application from scratch and decide it on its actual merits. The Court has also directed that this be done within an expedited timeframe, without relying on any of the citations or legal authorities that were found to be unreliable.
4. What steps has the Court directed to prevent this from happening again?
The Court has also taken steps to address the wider issue. It has directed the Bar Council of India to constitute a committee to frame clear guidelines and disciplinary norms for cases where AI-generated or “hallucinated” legal material is presented as precedent before courts or tribunals.
REFERENCE
• Pooja Ramesh Singh v. Jammu and Kashmir Bank Ltd. & Anr., 2026 INSC 668 (Indian Kanoon) read judgement
• Supreme Court official Judgement pdf Click here
