SUPREME COURT CLARIFIES APPLICABILITY OF LIMITATION ACT TO ARBITRATION PROCEEDINGS UNDER MSMED ACT
In a pivotal ruling delivered on July 17, 2025, by the Supreme Court in the case of M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board & Ors. (Civil Appeal Nos. 9524-9532 of 2025), the Court dissected the intersection of the Limitation Act, 1963 with the dispute resolution mechanisms under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act).
The judgment provides authoritative clarity on whether time-barred claims, i.e., debts beyond the limitation period, can be pursued through conciliation and arbitration under Section 18 of the MSME Act.
BACKGROUND OF THE CASE
The Appellants, a group of small-scale industrial suppliers, had entered into supply contracts with respondent entities for electrical transformers between 1993 and 2004. Alleging delayed payments, they approached the Industry Facilitation Council in 2005-06, a statutory body tasked with resolving such disputes, initially constituted under the repealed Interest on Delayed Payments Act, 1993, later taken over by the MSME Act’s Facilitation Council.
Despite favourable awards directing payment and interest, the respondent buyers challenged these on the ground that claims were barred by limitation laws. At the High Court level, conflicting judgments emerged, that is, a smaller bench initially ruled limitation did not apply to certain MSME Act proceedings, prompting a larger bench referral and a full bench decision ruled that the Limitation Act applies to arbitration but not conciliation proceedings under Section 18 of the MSME Act.
The Hon’ble Apex Court was thus, called upon to resolve these issues conclusively.
SUPREME COURT’S FINDINGS AND ANALYSIS
Applicability of Limitation Act to Conciliation [Sec. 18(2), MSMED Act]
The Hon’ble Apex Court examined the conciliation process under the Arbitration and Conciliation Act, 1996 and the MSME Act, emphasizing that conciliation is a non-adjudicatory, out-of-court mechanism where parties voluntarily agree to settle disputes with assistance from a conciliator.
The key observations of the SC included the following points:
- Conciliation under MSME Act is mandatory and conducted without requiring parties’ initial consent, yet the outcome hinges entirely on parties’ agreement;
- The Limitation Act, which governs suits, appeals, and applications in courts, does not extend to conciliation proceedings, because of it being a distinct, non-coercive process;
- A time-barred debt does not extinguish the underlying right to payment and the parties remain free to agree on repayment through conciliation;
- The Court drew upon Section 25(3) of the Indian Contract Act to affirm the validity of written promises to pay even time-barred debts.
Therefore, the time-barred claims cannot be outrightly excluded from the conciliation process under the MSME Act.
Applicability of Limitation Act to Arbitration [Sec. 18(3), MSMED Act]
Now, coming to Arbitration, the Hon’ble Apex Court held that:
- Arbitration under MSME Act is deemed to be pursuant to an arbitration agreement, attracting the entirety of Part I of the Arbitration & Conciliation Act 1996, including Section 43.
- 43 of the Arbitration & Conciliation Act, 1996 explicitly applies the Limitation Act to arbitral proceedings as it does to court proceedings.
- Conflicting provisions in Section 2(4) of the Arbitration & Conciliation Act 1996, excluding Section 43 from statutory arbitrations are overridden by the MSME Act’s non-obstante clause and Section 24’s overriding effect.
- As such, time-barred claims cannot be entertained in arbitration under MSMED, aligning with the statute’s objective of providing a speedy and definite recovery mechanism.
Effect of Disclosure of unpaid amount in financial statements (Sec. 22, MSMED Act)
The Court considered whether mandatory disclosure by buyers of unpaid amounts and interest in their annual accounts amounts to an acknowledgment extending the limitation period under Section 18 of the Limitation Act.
The Hon’ble Apex Court concluded that each case requires factual scrutiny, and, a mere financial statement entry may or may not qualify as a written acknowledgment of liability. Moreover, the Court ruled that the balance sheet note or auditor’s remarks could negate such acknowledgment. Hence, no blanket rule applies and therefore, extension of limitation under such disclosures must be evaluated in context.
KEY TAKEAWAYS FROM THE SC RULING
- Conciliation Proceedings: Limitation laws do not govern conciliation under the MSME Act. Time-barred debts can be amicably settled through conciliation, reinforcing the importance of consensual dispute resolution.
- Arbitration Proceedings: Limitation Act applies strictly to arbitration under MSMED Act Section 18(3). Time-barred claims cannot be arbitrated, preserving finality and procedural discipline.
- Acknowledgement in Account: Disclosure of unpaid debts in buyer’s financial statements may sometimes extend limitation but requires case-wise inquiry and cannot be applied to all cases on a uniform basis.
- Legislative Harmony: The decision highlights the supremacy of the MSMED Act provisions and reconciles its non-obstante clauses with the general laws of arbitration and limitation.
CONCLUSION
The SC judgment delineates crucial boundaries for dispute resolution under the MSME Act, ensuring that while buyers and suppliers are encouraged to resolve disputes amicably, conciliation with allowance for even time-barred claims, arbitration remains anchored to the Limitation Act to prevent stale claims.
The ruling strikes a fine balance between protecting suppliers’ rights and fostering legal certainty, emphasizing that conciliation offers a flexible remedy, while arbitration demands procedural rigor.
This nuanced interpretation will guide businesses, legal practitioners, and adjudicating bodies in addressing payment disputes in the MSME sector effectively and justly.
Soumen Dash
Associate
The Indian Lawyer and Allied Services
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