17 July 2025 MSME (Micro, Small & Medium Enterprises) >> Business & Commercial Law  

The Supreme Court of India recently addressed a pivotal question concerning the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), specifically the applicability of the Limitation Act, 1963, to conciliation and arbitration proceedings initiated under Section 18 of the MSMED Act. The case, M/s. Sonali Power Equipments Pvt. Ltd. v/s Chairman, Maharashtra State Electricity Board, Mumbai & Others, provided clarity on whether time-barred claims can be pursued through these mechanisms.

Background of the Dispute:

The appellants, small-scale industries, had supplied transformers to the Maharashtra State Electricity Board between 1993 and 2004. Facing delayed payments, they filed references in 2005-06 before the Industry Facilitation Council. These proceedings continued under the MSMED Act after the repeal of the 1993 Act. The Facilitation Council, in 2010, awarded the appellants' claims, including interest on delayed payments. This award was subsequently challenged and set aside by the Commercial Court on the ground of being time-barred, leading the appellants to appeal to the High Court.

The High Court's full bench, in an order dated October 20, 2023, considered two primary issues:

1. Whether the Limitation Act applies to conciliation proceedings under Section 18(1) & (2) of the MSMED Act.
2. Whether the Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act.

High Court's Ruling:

For arbitration proceedings under Section 18(3) of the MSMED Act, the High Court held that the Limitation Act is applicable. It reasoned that Sections 15 to 23 of the MSMED Act override Section 2(4) of the Arbitration and Conciliation Act, 1996 (ACA), thereby making the entirety of the ACA, including Section 43 (which deals with limitations), applicable to MSMED arbitrations. The court emphasized that allowing time-barred claims would contradict the MSMED Act's objective of providing a speedy remedy.

Regarding conciliation proceedings under Sections 18(1) and 18(2), the High Court noted that while there is no specific provision in the MSMED Act extending the Limitation Act to conciliation, it concluded that time-barred claims could not be entertained. This was based on an interpretation of "amount due" in Sections 17 and 18 of the MSMED Act, relying on previous Supreme Court decisions that "amount due" does not include time-barred debts.

Supreme Court's Affirmation and Refinement The Supreme Court granted leave in this appeal and carefully examined the High Court's decision.

Arbitration Proceedings:

The Supreme Court upheld the High Court's finding that the Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act. It reinforced that Section 18(3) of the MSMED Act, through its non-obstante clause and the statutory fiction of deeming the arbitration as pursuant to an arbitration agreement under Section 7(1) of the ACA, effectively incorporates the entire ACA, including Section 43, which explicitly applies the Limitation Act to arbitrations. The Court agreed that a contrary interpretation would undermine the MSMED Act's goal of speedy dispute resolution and could lead to the revival of stale claims.

Conciliation Proceedings:

Critically, the Supreme Court took a different stance on conciliation proceedings. It held that the Limitation Act does not apply to conciliation proceedings under the MSMED Act. The Court highlighted the non-adjudicatory and non-coercive nature of conciliation, emphasizing that it is a process based on negotiation, compromise, and voluntary settlement. Unlike a court or an arbitral tribunal, a conciliator cannot compel a settlement.

The Supreme Court further clarified that the Limitation Act bars the remedy through a court of law but does not extinguish the underlying right to recover a debt. Therefore, a time-barred debt still exists, and parties can mutually agree to its repayment, an agreement explicitly recognized under Section 25(3) of the Indian Contract Act, 1872. A settlement agreement reached through conciliation for a time-barred claim is akin to such a contract. Thus, the High Court's exclusion of time-barred claims from conciliation was deemed incorrect, as it overlooked the fundamental nature of conciliation and the legal principle that time-barred debts can be settled through agreement.

Conclusion:

The Supreme Court's judgment provides significant clarity on the interplay between the Limitation Act and the MSMED Act. It affirms the applicability of the Limitation Act to arbitration proceedings under the MSMED Act, aligning with the legislative intent for speedy dispute resolution. However, it distinguishes conciliation, clarifying that time-barred claims can be referred to conciliation, recognizing its non-adjudicatory nature and the possibility of amicable settlement between parties regarding such debts. This distinction safeguards the right to recovery while promoting alternative dispute resolution mechanisms under the MSMED Act.

  Micro, Small and Medium Enterprises Development Act, 2006  

  Indian Contract Act, 1872  

  Limitation Act, 1963