Supreme Court: In an appeal arising from insolvency proceedings against Essel Infraprojects Ltd. (EIL), the corporate guarantor of Pan India Utilities Distribution Company Ltd. (PIUDCL), a Division Bench of Pamidighantam Sri Narasimha and Alok Aradhe, JJ., set aside the orders of the NCLT and NCLAT which had admitted a Section 7 application under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court held that the adjudicatory process stood vitiated as the tribunals had relied upon non-existent, fake and hallucinated precedents, allegedly generated through artificial intelligence, thereby undermining the integrity of adjudication.
Reiterating a “zero-tolerance” approach towards reliance on unverified or AI-generated precedents, the Court held that a decision based on such material is no decision in the eyes of law and even an iota of such reliance vitiates the adjudication. While clarifying that artificial intelligence may be used as an aid, the Court emphasised that judicial decision-making must remain under human control. Accordingly, the impugned orders were set aside, the Section 7 IBC application was restored for fresh adjudication, and the matter was directed to be decided expeditiously on merits.
Background
The appeal arose from insolvency proceedings initiated against Essel Infraprojects Ltd. (EIL), the corporate guarantor of Pan India Utilities Distribution Company Ltd. (PIUDCL), which had availed loan facilities from Jammu and Kashmir Bank Ltd. Upon default by PIUDCL and classification of its accounts as non-performing assets, the Bank invoked the corporate guarantee and filed an application under Section 7 IBC before the NCLT, Mumbai. The NCLT admitted the application on 28 August 2024, finding existence of financial debt and default, appointed an Interim Resolution Professional, and declared moratorium under Section 14 IBC. The appellant, a suspended director of EIL, challenged the admission order before the NCLAT, contending that EIL’s liabilities stood transferred pursuant to demerger and amalgamation within the Essel group, and that a renewed sanction letter dated 18 November 2017 did not refer to the corporate guarantee, thereby implying its discharge. The NCLAT rejected these submissions, holding that internal corporate restructuring had no impact on the continuing liability of the corporate guarantor, particularly in view of the express terms of the guarantee deed which preserved the guarantee notwithstanding merger, demerger or amalgamation. Aggrieved by the dismissal of the appeal, the appellant approached the Supreme Court.
Analysis
The Supreme Court held that the adjudicatory process stood vitiated as both the NCLT and NCLAT had relied upon non-existent, fake and hallucinated judicial precedents, some of which were allegedly generated or supplemented through artificial intelligence, thereby contaminating the reasoning process. Reiterating that a judicial determination founded on fictitious or non-existent material is no decision in the eyes of law, the Court observed that such reliance amounts to a serious subversion of the rule of law and strikes at the very integrity of adjudication.
“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 Court reiterated that courts must adopt a “zero-tolerance mode” for producing, citing or relying upon AI-generated precedents without verification, observing that such reliance amounts to a serious lapse both on the part of the Bar and the Bench. The Court categorically declared that a decision based on such non-existent or hallucinated material is no decision in the eyes of law, irrespective of whether such material had a direct or indirect bearing on the outcome, and that even an iota of such material entering the decision-making process vitiates the adjudication as it violates the sanctity of judicial determination.
While clarifying that the judgment does not restrict the rightful use of artificial intelligence as an aid, the Court confined its prohibition to the presentation or reliance upon fake or hallucinated material as judicial precedent. The Court further emphasised that mere declaration is insufficient and directed consequential action, instructing the Bar Council of India to constitute a committee to examine the issue, frame guiding principles, and prescribe disciplinary consequences for advocates found relying on or submitting such material before courts.
“Today’s courts and tribunals implicitly trust lawyers when referring to precedents cited before them. Imagine the hardship of a situation in which the Court must verify the authenticity of each judgment cited by an advocate.”
“Judicial process and the judgment under challenge are tainted by the usage of materials which are said to be precedents, but in reality, they are unreal, fake, and do not exist at all. A decision of a Court or an adjudicating authority based on material which is fake and hallucinated is no decision at all, and it amounts to subversion of the rule of law. Such a decision is unsustainable and has to be set aside at the earliest.”
Decision
Holding that even an iota of reliance on fake or hallucinated material vitiates the decision-making process, the Court set aside the judgments of the NCLT and NCLAT dated 28 August 2024 and 11 September 2025, restored the Section 7 IBC application [RCP (IB) 6/MB/2023] to its original file, and directed the adjudicating authority to proceed afresh in accordance with law. The Court further directed the NCLT to dispose of the Section 7 IBC application expeditiously, preferably within 2 weeks, keeping in view that the proceedings were pending for a considerable period, and further directed the parties to maintain status quo as it exists on the date of the judgment pending final disposal. It was, however, clarified that the Court had not expressed any opinion on the merits of the controversy, leaving all issues open to be adjudicated by the NCLT uninfluenced by any observations made in the present judgment.
Also Read: SC raises concern over AI-generated fake precedents | SCC Times
[Pooja Ramesh Singh v. Jammu and Kashmir Bank Ltd., CIVIL APPEAL NO. 11950 of 2025, decided on 2-7-2026]
