Supreme Court Sets Aside NCLT Insolvency Order Over AI-Hallucinated Fake Judgments and Asks BCI to Frame Norms

The Supreme Court has set aside an order of the National Company Law Tribunal (NCLT) in the Essel Infraprojects insolvency matter after discovering that the tribunal's judgment relied on non-existent, fabricated legal precedents generated through artificial intelligence tools. In a landmark ruling delivered on July 2, 2026, a Bench of Justices P.S. Narasimha and Alok Aradhe declared that courts must adopt a "zero tolerance" approach to AI-hallucinated citations and directed the Bar Council of India to constitute a committee to frame guidelines addressing the submission of such material by members of the Bar.

The Underlying Insolvency Dispute

The insolvency proceedings arose from a Section 7 application filed by Jammu and Kashmir Bank Limited under the Insolvency and Bankruptcy Code, 2016. The bank claimed a default of over Rs 87.43 crore relating to a Rs 200 crore credit facility extended in 2013 to Pan India Utilities Distribution Company Limited, with Essel Infraprojects standing as a corporate guarantor for the borrowing. On August 28, 2024, the NCLT Mumbai Bench admitted the insolvency plea, holding that the corporate guarantee continued to operate despite restructuring and internal transfers within the Essel group. Pooja Ramesh Singh, the suspended director of Essel Infraprojects, challenged the admission order before the National Company Law Appellate Tribunal (NCLAT) and subsequently before the Supreme Court.

Discovery of AI-Generated Fake Citations

During the proceedings, the Supreme Court discovered that the NCLT's judgment contained references to legal precedents and judgments that simply did not exist. Upon examination, it became evident that these citations had been generated through AI tools, which are known to produce plausible-sounding but entirely fabricated case references, a phenomenon commonly referred to as "AI hallucination." The fake citations had been woven into the tribunal's reasoning, forming part of the basis on which the insolvency admission order was sustained.

The Bench noted that the presence of such hallucinated material was not a minor technical error but a fundamental defect that vitiated the entire adjudicatory process. The Court observed that when fabricated precedents enter a judicial decision, there is no way to determine the extent to which the outcome was influenced by the non-existent authorities. The contamination, once introduced, renders the decision unreliable regardless of whether the other reasoning in the judgment might independently support the conclusion.

The "Methyl Isocyanate" Analogy

In one of the most striking passages of the judgment, the Bench compared the production of fake, hallucinated legal material to "the release of methyl isocyanate in the province of law and justice." This comparison to the deadly chemical involved in the 1984 Bhopal gas tragedy underscored the Court's view of the severity of the threat posed by AI-generated false citations. The Bench stated that such fabricated material is "invisible, insidious and catastrophic" in its effects on the administration of justice, as it corrupts the decision-making process from within without any visible external indication of contamination.

Zero Tolerance Standard

The Supreme Court established what it described as a "zero tolerance" standard for dealing with AI-hallucinated material in judicial proceedings. The Bench held that if even an iota of fake or hallucinated material enters the decision-making process, the resulting order must be set aside. This is a stringent standard that does not permit courts to engage in a harmless-error analysis or to assess whether the hallucinated citations were material to the outcome. The Court's reasoning is that the integrity of adjudication depends on the reliability of every precedent cited, and the introduction of fabricated authorities fundamentally undermines that integrity.

The Bench set aside both the NCLT and NCLAT orders and directed the tribunals to decide the matter afresh on the basis of verified facts and legitimate legal authorities. This direction ensures that the insolvency proceedings will be adjudicated without any taint from the earlier contaminated proceedings.

Direction to the Bar Council of India

In addition to setting aside the impugned orders, the Supreme Court directed the Bar Council of India, as the apex statutory body regulating the legal profession, to constitute a committee to examine the issue of members of the Bar submitting fake and hallucinated material before courts. The committee is tasked with framing guidelines and prescribing norms and disciplinary measures to prevent the submission of AI-generated fabricated material in judicial proceedings. This direction recognizes that the responsibility for preventing AI-hallucinated citations from entering the judicial process falls primarily on the lawyers who submit them.

The BCI has already been engaged with questions of professional conduct and ethics in other contexts, including the regulation of advocates' conduct on digital platforms. The direction to frame guidelines on AI-generated material adds a new dimension to the BCI's regulatory responsibilities, requiring it to address the risks posed by emerging technologies to the integrity of legal practice.

Implications for Legal Practice

The ruling carries significant implications for the legal profession. Lawyers who use AI tools for legal research must exercise heightened diligence to verify that every case citation, statutory reference, and legal principle generated by such tools actually exists. The Supreme Court's zero tolerance standard means that the submission of even a single hallucinated citation could result in the setting aside of an order and potential disciplinary consequences for the lawyer responsible. The judgment also raises questions about institutional safeguards that courts and tribunals should adopt to detect AI-generated fake citations in submissions made before them.

The case has attracted widespread attention as one of the first instances in India where a judicial order was set aside specifically because of reliance on AI-hallucinated material. As AI tools become increasingly prevalent in legal research and drafting, the frameworks established by this ruling and the forthcoming BCI guidelines will shape how the legal profession navigates the intersection of artificial intelligence and judicial proceedings. Legal practitioners and corporate entities involved in insolvency matters would be well advised to take note of the standards articulated in this judgment.