Supreme Court: While considering an appeal, the Division Bench of P.S. Narasimha* and Joymalya Bagchi, JJ., had to decide whether the provisions of the Limitation Act, 1963 are applicable to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). Further, even if the Limitation Act is not applicable, whether a supplier can recover a time-barred debt by taking recourse to the remedies provisioned under Section 18 of the MSMED Act.
The Court upon deliberating over the issues, opined that Limitation Act does not apply to conciliation proceedings under Section 18(2) of the MSMED Act. A time-barred claim can be referred to conciliation as the expiry of limitation period does not extinguish the right to recover the amount, including through a settlement agreement that can be arrived at through the conciliatory process.
Background:
The appellants are small-scale industries registered with the District Industries Centre, Nagpur and have supplied transformers to the respondent under various purchase orders between 1993 to 2004. Due to delay in payments, the appellants filed references in 2005-06 before the Industry Facilitation Council established under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The 1993 Act was subsequently repealed by the MSMED Act and the proceedings initiated by the appellants were taken up by the Micro and Small Enterprises Facilitation Council (Facilitation Council).
By its award dated 28-01-2010, the Facilitation Council allowed the appellants’ claims and awarded interest on the delayed payments. This was challenged by the respondents under Section 34 of the Arbitration and Conciliation Act, 1996 (ACA), and deposited the requisite amount under Section 19 of the MSMED Act. This was allowed by the Commercial Court by order dated 26-10-2017 and it set aside the award on the ground that the claims were barred by limitation, against which order the appellants filed appeals under Section 37 of the ACA before Bombay High Court.
A full bench of the High Court held that the Facilitation Council cannot entertain time-barred claims for conciliation, and that the provisions of the Limitation Act are applicable to arbitration proceedings under the MSMED.
Court’s Assessment:
Perusing the impugned judgment of the High Court, it was noted that multiple issues were framed, however, the Court confined its examination to the following issues:
(i) Whether the Limitation Act applies to conciliation proceedings under Section 18 of the MSMED Act, and even if not, whether time-barred debts can be referred to conciliation?
(ii) Whether the Limitation Act applies to arbitration proceedings under Section 18 of the MSMED Act, and whether time-barred debts can be referred to arbitration? Further, what is the effect of disclosure of the unpaid amount in the buyer’s financial statements as mandated under Section 22 on extending the limitation period?
Perusing the relevant statutory provisions in ACA, Limitation Act and MSMED Act and taking note that ‘Conciliation’ has not been defined per se in the ACA and MSMED Act, the Court therefore delved into several judicial precedents wherein the Supreme Court had to interpret conciliation. The Court hence culled out the following features of conciliation:
- Conciliation is not an adjudicatory or judicial process where the conciliator hears the parties and decides a dispute.
- The parties to the conciliation resolve their disputes through settlement, whose terms may be arrived at with the assistance of the conciliator. The role of the conciliator is to guide and assist the parties in arriving at a compromise or settlement, make proposals for settlement, formulate the terms of settlement or assist the parties in doing so, and reformulate the terms of settlement based on the observations of the parties.
- The conciliator must be guided by the principles of independence, impartiality, objectivity, justice, equity, fair play, fairness, and confidentiality, and must also consider the rights and obligations of the parties, trade usages, and business practices between the parties. Conciliator must also consider the wishes of the parties and the need for speedy settlement of dispute. The parties must also cooperate with the conciliator in good faith and endeavour to comply with the conciliator’s requests.
-
The terms of the settlement that are recorded in a settlement agreement must be signed by the parties and it shall be final and binding on them. The same is enforceable as an arbitral award.
The Court pointed out that Section 18(2) of the MSMED Act provides that conciliation must be conducted as per Sections 65 to 81 of the ACA. Upon perusal of these provisions, the Court pointed out that there is no provision that extends the applicability of the Limitation Act to conciliation proceedings. Furthermore, neither Section 29(2) nor any other provision of the Limitation Act has the effect of extending its application to conciliation proceedings. Limitation Act applies on suits, appeals etc., filed before the courts; whereas Conciliation being an out-of-court and non-adjudicatory process of dispute resolution, the Limitation Act cannot be extended to it.
The Court explained that while Section 18(2) of the MSMED Act does away with the requirement of consent for conciliation as provided in Section 61 of the ACA and statutorily mandates the Facilitation Council and parties to explore conciliation for dispute resolution, the ultimate outcome of conciliation remains entirely dependent on the parties. Sections 65 to 81 of the ACA apply to conciliation proceedings under the MSMED Act as per Section 18(2). The parties must be agreeable to the terms of settlement. The conciliator cannot, and must not, coerce the parties to agree to certain terms or settle the dispute. Ultimately, if the parties are not willing to amicably settle the dispute, either or both can terminate the conciliation proceedings as per Section 76 of the ACA.
The Court stated that time-barred claims must not be excluded from conciliation under the MSMED Act. The statute of limitation only bars the remedy, but does not extinguish the underlying right, which in this case is the right to recover the unpaid amount and interest thereon. A settlement agreement for a time-barred claim arrived at between the buyer and supplier through conciliation under Section 18(2) of the MSMED Act is precisely in the nature of a contract recognised and declared valid under Section 25(3) of the Contract Act. Although certain remedies are no longer available in law to the creditor once the limitation period expires, the creditor can adopt other methods, including contractual agreements, to recover time barred debts. 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.
Therefore, vis-a-vis issue (i), the Court concluded that neither the Limitation Act applies to conciliation proceedings under Section 18(2) nor are time-barred claims excluded from such conciliation. The supplier’s right to recover the principal amount and interest thereon subsists even after the expiry of the limitation period, and he may recover the same through a settlement agreement arrived at through conciliation by the Facilitation Council under Section 18(2). In case such settlement is not reached between the parties and the conciliation proceedings are terminated for this reason, the matter must be referred to arbitration as per Section 18(3).
Coming onto the next issue, the Court pointed out that Section 18 of the MSMED Act provides for arbitration by the Facilitation Council in the following terms.
- Section 18(1) commences with a non-obstante clause and provides for reference of a dispute regarding the amount due under Section 17 to the Facilitation Council.
- While Section 18(2) mandates conciliation,
-
Section 18(3) deals with the eventuality of failure of settlement. It provides that when the conciliation stands terminated without a settlement, the matter must be referred to arbitration and the provisions of the ACA shall apply as if the arbitration is in pursuance of an arbitration agreement under Section 7(1) of the ACA.
Therefore, clearly there is a statutory deeming fiction that the arbitration under the statute is to be considered as being pursuant to an arbitration agreement.
The Court further pointed out that There is a clear and apparent conflict in the manner in which the provisions of the ACA are made applicable — while Section 2(4) ACA provides for the exclusion of Section 43 ACA to statutory arbitrations, Section 18(3) MSMED Act provides for the applicability of all the provisions of the ACA as would apply if there were an arbitration agreement, which includes Section 43.
Taking note of the aforementioned conflict, the Court opined that Section 18(3) of the MSMED Act will prevail over Section 2(4) of the ACA. There is a clear legislative intent that the provisions of the MSMED Act will have an overriding effect in case of inconsistency, which is evidenced from the non-obstante clause in Section 18 and the express language in Section 24 of the MSMED Act. The language of Section 2(4) of the ACA itself also supports this overriding effect of the special law.
Therefore, the Court further opined that 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. Pursuant to the deeming fiction ingrained in the language of Section 18(3), the arbitration conducted thereunder would attract the provisions that are otherwise applicable when there is an arbitration agreement. This includes Section 43, thereby making the Limitation Act applicable to arbitral proceedings under the MSMED Act.
Hence, the Court answered issue (ii) concluding that Section 43 of the ACA applies to arbitrations under Section 18 of the MSMED Act, thereby attracting the provisions of the Limitation Act to claims made under the MSMED Act. The Court further concluded that the extension of the limitation period on the basis of disclosure under Section 22 of the MSMED Act must be examined on a case-to-case basis.
With the afore-stated assessment, the Court partly allowed the appeal and set aside Bombay High Court’s decision to the extent of applicability of the Limitation Act to conciliation proceedings under the MSMED Act. The Court however, upheld the High Court’s decision on the applicability of the Limitation Act to arbitration proceedings under the MSMED Act.
[Sonali Power Equipements Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, CIVIL APPEAL NOS. 9524-9532 OF 2025, decided on 17-7-2025]
*Judgment by Justice P.S. Narasimha
Advocates who appeared in this case :
For Petitioner(s): Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Jayant Bhushan, Sr. Adv. Mr. Prashant Pakkhidey, Adv. Mr. Surjendu Sankar Das, AOR Mr. Manav Gill, Adv. Ms. Annie Mittal, Adv.
For Respondent(s): Mr. Shikhil Suri, Sr. Adv. Mr. Udit Gupta, Adv. Mr. Amarendra Kumar, Adv. Mr. Vyom Chaturvedi, Adv. Ms. Pragya Gupta, Adv. Ms. Sneha Singh, Adv. Ms. Nishtha Goel, Adv. Ms. Deepshikha Kumar, Adv. Ms. Prachi Gupta, Adv. M/S. Udit Kishan And Associates, AOR
Buy Arbitration and Conciliation Act, 1996 HERE
