The Supreme Court on Thursday set aside insolvency orders against Essel Infraprojects Ltd after finding that the tribunal had relied on fake and AI-generated judicial precedents, marking what is being described as one of India's most significant rulings on the use of artificial intelligence in the legal system. According to Business Standard, the apex court quashed orders passed by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), which had admitted Essel Infraprojects into the corporate insolvency resolution process. The matter has now been remanded to the NCLT's Mumbai bench for a fresh adjudication based solely on verified facts and applicable law. A Bench of Justices P S Narasimha and Alok Aradhe held that reliance on hallucinated legal material 'strikes at the integrity of adjudication and its processes' and directed courts to adopt a 'zero-tolerance' approach towards the production or use of AI-generated precedents without proper verification. In a significant development, the Court has now directed the Bar Council of India (BCI) to frame norms governing the use of AI-generated legal material, recognizing that judicial directions alone cannot address the problem.
The Court held that citing fake AI-generated precedents amounts to 'professional misconduct' by advocates and observed that it is a serious judicial lapse if a judge relies on such fabricated material while deciding a case. As reported by Business Standard, the Court declared that 'such a decision is no decision in the eyes of the law' and stated that a judgment must be set aside even if 'an iota' of fake or hallucinated material enters the decision-making process. In one of the judgment's most striking passages, the Court compared AI hallucinations in legal research to a toxic leak, stating that '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 issue came to light after senior advocate Madhavi Divan, appearing for Essel Infraprojects, argued that several judicial precedents relied upon by the NCLT either did not exist or contained passages that were never part of the original judgments.
The Bench raised concerns over the use of artificial intelligence (AI) in the judicial process, noting that while AI can be used as an assistive tool, 'human control over adjudication must remain total and absolute at every stage.' According to Business Standard, the Court acknowledged that professionals may increasingly rely on AI to manage growing workloads, but cautioned that unregulated use could erode independent reasoning and make legal professionals overly dependent on technology. The Court observed that unlike other technologies already integrated into courts, AI is capable of influencing thinking, reasoning and decision-making, warning judges to exercise caution while using such tools. The Court emphasized that 'mere declaration of prohibitory action is not sufficient and there must be a consequential action following accountability' and noted that 'it is absolutely necessary to maintain integrity in decision-making.' Recognizing the need for systematic approach, the Court has asked the BCI to constitute a committee to examine the issue and formulate guiding principles, with the committee tasked to consider preventive measures as well as disciplinary consequences for lawyers who submit fabricated AI-generated authorities as genuine precedents.
The dispute relates to insolvency proceedings initiated by Jammu & Kashmir Bank against Essel Infraprojects, which had acted as a corporate guarantor for loans extended to another company. As reported by Business Standard, the appellant challenged an NCLT Mumbai order that had admitted a Section 7 insolvency application. The top court found that several 'precedents' cited by the NCLT to justify its decision simply did not exist, including fabricated case names and paragraphs wrongly attributed to genuine citations. For instance, the judgement cited ICICI Bank Ltd vs Urban Infrastructure Real Estate Ltd (2019) 16 SCC 528 and Sarbjit Singh vs Union Bank of India (2022) 7 SCC 464, both of which were found to be entirely non-existent citations. While respondent Jammu and Kashmir Bank filed an affidavit clarifying that their counsel had not cited these cases and that the NCLT had obtained them through its 'own research', the apex court held that the source of the error did not mitigate the damage to the rule of law. The judgment comes amid a growing number of incidents involving AI-generated legal hallucinations in Indian courts and abroad, with the Court noting that 'the issue went beyond the facts of a single insolvency dispute and touched the integrity of the justice delivery system itself.'
The Supreme Court case has exposed a critical gap in India's legal framework regarding AI accountability. According to legal experts, currently, India does not have a law that specifically assigns liability for AI-generated errors, with existing laws such as the Information Technology Act, contract law, tort law, consumer protection provisions, intellectual property law and sectoral regulations applying only on a case-by-case basis. As reported by Business Standard, Ashwini Kumar, advocate and founder of My Legal Expert (MLE), said that any imposition of liability today is determined through conventional legal principles such as negligence, duty of care, etc., with courts likely to determine responsibility based on foreseeability, negligence and contractual allocation of risk. Shreya Suri, partner at CMS INDUSLAW, noted that liability questions currently fall back on existing legal provisions, including information technology laws, the Bharatiya Nyaya Sanhita, intellectual property laws and intermediary liability provisions. The legal position becomes particularly complex because AI itself cannot be held responsible, with organizations using AI likely to face initial scrutiny if AI-generated errors cause financial loss. Venkatesh Naidu, CEO of BajajCapital Insurance Broking, said that organizations using AI would likely face scrutiny first, with the natural question being 'who signed off on this?' when AI-generated recommendations prove wrong.
