Limitation Act Applies to MSMED Arbitration but Not Conciliation; Time-Barred Claims Can Be Conciliated: Supreme Court - 2025-07-18

Limitation Act Applies to MSMED Arbitration but Not Conciliation, Supreme Court Clarifies

New Delhi: In a significant ruling clarifying the dispute resolution process under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the Supreme Court has held that while the Limitation Act, 1963 applies to arbitration proceedings, it does not bar the conciliation of time-barred debts.

A bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar partially allowed an appeal by M/s Sonali Power Equipments Pvt. Ltd., setting aside a part of a Bombay High Court full bench judgment. The Court ruled that a supplier's right to recover dues subsists even after the limitation period expires, and such claims can be settled through the mandatory conciliation process under the MSMED Act.

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A Dispute Spanning Decades

The case originated from disputes over delayed payments for transformers supplied by the appellant, M/s Sonali Power Equipments Pvt. Ltd., to the Maharashtra State Electricity Board between 1993 and 2004. The supplier initiated proceedings for recovery before the Industry Facilitation Council in 2005-06, which were later continued under the MSMED Act, 2006.

The Facilitation Council awarded interest on the delayed payments in 2010. However, a Commercial Court set aside this award, finding the claims to be barred by limitation. The matter eventually reached a full bench of the Bombay High Court, which held that the Limitation Act applied to both conciliation and arbitration under the MSMED Act, effectively disallowing time-barred claims from being entertained by the Council.

Key Arguments Before the Apex Court

Appellant (M/s Sonali Power Equipments): Argued that the MSMED Act, being a special beneficial legislation, should not be constrained by the Limitation Act. They contended that Section 2(4) of the Arbitration and Conciliation Act, 1996 (ACA) excludes the applicability of Section 43 (which applies the Limitation Act to arbitrations) to statutory arbitrations. They further submitted that the mandatory disclosure of dues in the buyer's balance sheet under Section 22 of the MSMED Act acts as an acknowledgment of debt, extending the limitation period.

Respondent (Maharashtra State Electricity Board): Countered that Section 18(3) of the MSMED Act creates a statutory fiction, treating the arbitration as one under the ACA, thereby incorporating all its provisions, including Section 43. They argued that allowing time-barred claims would create an anomaly where a claim rejected by a civil court could be revived before the Facilitation Council, defeating the Act's purpose of speedy resolution.

Supreme Court's Differentiated Approach to Conciliation and Arbitration

The Supreme Court meticulously analyzed the distinct nature of conciliation and arbitration under Section 18 of the MSMED Act to arrive at its nuanced decision.

On Conciliation: Limitation No Bar

The bench overturned the High Court's finding on conciliation. It observed that conciliation is a non-adjudicatory and non-coercive process aimed at facilitating a settlement between parties.

"It is a settled position of law that the statute of limitation only bars the remedy, but does not extinguish the underlying right," the Court noted.

The judgment emphasized that a settlement for a time-barred debt reached through conciliation is valid and enforceable, much like a contract under Section 25(3) of the Indian Contract Act, 1872. The Court reasoned:

"Conciliation as a dispute-resolution process only facilitates the parties in arriving at such a contract or settlement agreement. Hence, it is not correct to exclude time-barred claims from being settled through conciliation under Section 18(2) of the MSMED Act."

On Arbitration : Limitation Act is Applicable

The Court upheld the High Court's view that the Limitation Act applies to arbitration proceedings initiated under Section 18(3) of the MSMED Act, affirming its earlier decision in Silpi Industries v. Kerala SRTC (2021) .

The bench resolved the apparent conflict between Section 2(4) of the ACA (which excludes statutory arbitrations from Section 43) and Section 18(3) of the MSMED Act. It held that the MSMED Act, being a special law, overrides the general provisions of the ACA. The Court highlighted the non-obstante clause in Section 18 and the overriding effect given by Section 24 of the MSMED Act.

"The applicability of the ACA to arbitrations under the MSMED Act is not determined by Section 2(4) of the ACA, and is rather determined as per Section 18(3) of the MSMED Act," the judgment clarified.

This statutory fiction in Section 18(3) means the arbitration proceedings attract all provisions of the ACA, including Section 43, thereby making the Limitation Act applicable. On the issue of debt acknowledgment under Section 22 of the MSMED Act, the Court stated that its effect on extending limitation must be determined on a case-by-case basis.

The Final Verdict

The Supreme Court partly allowed the appeal, concluding that:

1. The Limitation Act does not apply to conciliation proceedings under Section 18(2) of the MSMED Act. Time-barred claims can be validly referred to and settled through conciliation.

2. The Limitation Act does apply to arbitration proceedings under Section 18(3) of the MSMED Act.

This landmark judgment provides crucial clarity for MSMEs, affirming their right to seek recovery of even time-barred debts through conciliation, while ensuring that subsequent arbitration proceedings adhere to the established principles of limitation.