Why in news?

Recently, the Supreme Court struck down a National Company Law Tribunal (NCLT) order. The order had relied on six court judgments as precedents.

All six turned out to be problematic. Three judgments did not exist at all. The other three either didn't say what the tribunal claimed, or belonged to a different case entirely.

What’s in Today’s Article?

• The Case Background
• The Fake Citations
• What the Supreme Court Said?
• Wider Directions Issued
• Not the First Such Incident
• Conclusion

The Case Background

• In 2013, a company called Essel Infraprojects promised to repay a loan if another company failed to. This kind of promise is called a "corporate guarantee."
  • The loan itself was for Rs 200 crore. It was given by Jammu and Kashmir Bank to a different company, Pan India Utilities Distribution Company Ltd.
• Later, Pan India Utilities failed to repay the loan. Since Essel had promised to pay on its behalf, the bank came after Essel under the Insolvency and Bankruptcy Code (IBC).
  • Under this law, if a company cannot pay its debts, it can be taken to a special court for resolution. This is exactly what the bank did.
• Essel did not argue that the loan existed or that it had gone unpaid. Those facts were not in dispute. Instead, Essel argued something different: it said it was no longer responsible for this guarantee at all.
• Why did Essel say this?
  • In 2014, the company had gone through a restructuring. Part of its business was separated out (this is called a "demerger"), and then merged into another company (this is called an "amalgamation").
  • This restructuring was approved by the Bombay High Court. Essel claimed that when this happened, its old responsibility — including the guarantee — had passed on to the new company.
  • So, Essel argued, it was no longer the one who should be held responsible.
• Tribunal’s Judgement
  • The tribunal handling the case, called the NCLT (National Company Law Tribunal), did not accept this argument. In 2024, it rejected Essel's defence and allowed the bank's case to proceed.
  • Essel then appealed to a higher tribunal, the NCLAT (National Company Law Appellate Tribunal). But in September 2025, the NCLAT agreed with the NCLT's decision.
  • Importantly, the NCLAT did not check whether the case references (citations) used by the NCLT were even real.
  • This became a major problem later, since those citations turned out to be fake or wrongly quoted.

The Fake Citations

• Three judgments simply didn't exist:
  • ICICI Bank Ltd v Urban Infrastructure Real Estate Ltd (2019)
  • V S Dempo & Co Ltd v Reliance Communications Ltd (2021)
  • Sarbjit Singh v Union Bank of India (2022)
• Two judgments were real, but the quoted passages were not found anywhere in them:
  • Everest Kento Cylinders Ltd v Union of India (2015)
  • Canara Bank v N G Subbaraya Setty (2018)
• The sixth judgment cited was actually a different case altogether. The tribunal called it State Bank of India v Shree Ram Urban Infrastructure Ltd, but it was really M Subramaniam v S Janaki. The quoted passage wasn't in either judgment.
• Importantly, neither party's lawyers had cited these judgments. J&K Bank told the Supreme Court that its counsel never referred to them.
• The tribunal appears to have generated these citations through its own AI-assisted research.

What the Supreme Court Said?

• The SC bench used strong language. They compared AI hallucination in judicial work to a toxic gas leak — "invisible, insidious, and catastrophic by the time anyone notices."
• They warned that relying on AI could make judges dependent on it and erode independent judicial reasoning over time.
• The court held that even "an iota" of fake or hallucinated material in a decision is enough to set it aside.
• A decision built on fabricated case law, the bench said, "is no decision at all."

Wider Directions Issued

• The Supreme Court asked the Bar Council of India to set up a committee. This committee will study how AI is being used in litigation across courts.
• The court also warned that lawyers citing AI-generated case law without verification could face professional misconduct
• For now, the NCLT will decide the insolvency petition afresh. Both parties have been told to maintain status quo until then.

Not the First Such Incident

• The same bench had faced a similar problem in February 2026, in Gummadi Usha Rani v Sure Mallikarjuna Rao.
• There, an Andhra Pradesh trial court had relied on four fake AI-generated judgments.
• The High Court had merely issued "a word of caution." This time, the Supreme Court took a much harder line, calling such reliance not just an error but potential "misconduct" with legal consequences.

Conclusion

• This case marks a serious warning from India's top court on AI use in judicial decision-making. It shows that AI hallucination isn't just a drafting inconvenience — it can invalidate an entire legal order.
• The Supreme Court has made clear that courts and lawyers alike carry a duty to verify every citation, and that unchecked AI use in law can silently corrode the foundation of judicial reasoning itself.
• With the Bar Council now examining the issue formally, this ruling is likely to become a key reference point for how AI tools are regulated within India's legal system going forward.