Supreme Court clarifies application of Limitation Act to MSMED Act conciliation and arbitration

The Supreme Court, in the case of Sonali Power Equipments Pvt Ltd. vs. Chairman, Maharashtra State Electricity Board, Mumbai & Ors., addressed the crucial question of whether the provisions of the Limitation Act, 1963, apply to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

Here’s a detailed analysis of the Supreme Court’s order:

I. Core Issues Before the Supreme Court: The Supreme Court reformulated and primarily confined its examination to two issues:

1. 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.
2. 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. Additionally, 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.

II. High Court’s Impugned Order (dated 20.10.2023) A full bench of the High Court had ruled on these issues as follows:

• Applicability of Limitation Act to Arbitration (Section 18(3) MSMED Act): The High Court held that the Limitation Act, 1963, is applicable to arbitration proceedings under Section 18(3) of the MSMED Act. It reasoned that Sections 15 to 23 of the MSMED Act override Section 2(4) of the Arbitration and Conciliation Act, 1996 (ACA), due to the non-obstante clause in Section 18 and the overriding effect of Section 24 of the MSMED Act. Therefore, the entirety of the ACA, including Section 43 (which applies the Limitation Act to arbitrations), would apply. Allowing time-barred claims in arbitration would contradict the MSMED Act’s purpose of providing speedy remedies.
• Applicability of Limitation Act to Conciliation (Sections 18(1) & 18(2) MSMED Act): The High Court noted that there is no specific provision extending the Limitation Act to conciliation proceedings. However, it interpreted “amount due” in Sections 17 and 18 of the MSMED Act not to include time-barred, stale, and dead claims, relying on the Supreme Court’s decisions in V.R. Kalliyanikutty and Lanco Kondapalli Power Ltd. Thus, while the Limitation Act doesn’t directly apply, the Facilitation Council cannot entertain time-barred claims in conciliation.

III. Supreme Court’s Analysis and Reasoning

A. Applicability of Limitation Act to Conciliation Proceedings (Section 18(2) MSMED Act)

• The Supreme Court noted that Section 18(2) of the MSMED Act mandates conciliation to be conducted as per Sections 65 to 81 of the ACA. Crucially, there is no provision in the ACA or MSMED Act that extends the applicability of the Limitation Act to conciliation proceedings.
• The Court emphasized that the Limitation Act generally applies to suits, appeals, and applications filed before courts. Conciliation, being an out-of-court and non-adjudicatory process, does not fall within this purview.
• The Supreme Court differentiated conciliation under the MSMED Act from the recovery process examined in V.R. Kalliyanikutty. It highlighted that conciliation is not a judicial or coercive process; its outcome depends entirely on the parties’ willingness to amicably settle. The conciliator cannot coerce parties to agree, and either party can terminate the proceedings if no settlement is reached.
• Therefore, the Supreme Court concluded that the decision in V.R. Kalliyanikutty

is not applicable to conciliation proceedings under the MSMED Act due to their non-adjudicatory and non-coercive nature.

B. Applicability of Limitation Act to Arbitration Proceedings (Section 18(3) MSMED Act)

• The Supreme Court addressed the conflict between Section 2(4) of the ACA (which generally excludes Section 43 from statutory arbitrations) and Section 18(3) of the MSMED Act (which makes the entire ACA applicable to arbitrations under it, including Section 43).
• The Court affirmed that Section 18(3) of the MSMED Act will prevail over Section 2(4) of the ACA. This is due to the clear legislative intent of the MSMED Act having an overriding effect, evidenced by the non-obstante clause in Section 18 and the express language in Section 24. The MSMED Act is considered a special law that overrides the general provisions of the ACA.
• The Supreme Court upheld its earlier decision in

Silpi Industries, which held that the Limitation Act is applicable to arbitration proceedings under Section 18 of the MSMED Act, even though Silpi Industries did not explicitly consider Section 2(4) of the ACA. The Court provided its reasoning for why Section 2(4) would not apply in this context.

• Regarding the argument that

Lanco (relied upon in Silpi Industries) was per incuriam, the Supreme Court clarified that the issue of limitation was not directly examined in detail in TANGEDCO, distinguishing it from Lanco.

C. Effect of Disclosure under Section 22 of the MSMED Act

• Section 22 of the MSMED Act mandates buyers to disclose unpaid principal amounts and interest due to suppliers in their annual statements of accounts.
• The appellants argued that this disclosure acts as an acknowledgment of debt, extending the limitation period under Section 18 of the Limitation Act.
• The High Court had concluded that Section 22’s purpose is not to permit dead and stale claims or stretch the concept of a continuing cause of action to an “absurd point of time”. It stated that the charging of interest under Section 16 does not create a fresh cause of action every month, which would eliminate any time limit for suppliers to raise claims.
• The Supreme Court stated that the effect of disclosure under Section 22 on extending the limitation period “must be examined on a case-to-case basis”. This indicates that a universal rule cannot be applied, and the specific facts of each case, along with the nature of the disclosure, will determine its impact on limitation.

IV. Supreme Court’s Conclusion The Supreme Court partly allowed the appeals, concluding as follows:

1. Conciliation Proceedings: The Limitation Act, 1963, does not apply to conciliation proceedings under Section 18(2) of the MSMED Act. There is no legal bar in the Limitation Act, MSMED Act, ACA, or legal precedents that prohibits conciliation with respect to time-barred debts. The “amount due” can include time-barred claims for conciliation. This means parties can explore amicable settlements for time-barred debts through conciliation.
2. Arbitration Proceedings: The Limitation Act, 1963, is applicable to arbitration proceedings under Section 18(3) of the MSMED Act. The applicability of the ACA’s provisions to such arbitrations is determined by Section 18(3) and other special provisions of the MSMED Act, overriding Section 2(4) of the ACA.
3. Section 22 Disclosure: The extension of the limitation period based on disclosures under Section 22 of the MSMED Act must be examined on a case-to-case basis.

In essence, the Supreme Court has differentiated between conciliation and arbitration under the MSMED Act concerning the applicability of the Limitation Act, providing clarity on a critical aspect of dispute resolution for Micro, Small and Medium Enterprises.

Also Read: Case study: Swiss Ribbons Pvt. Ltd. & Anr vs Union of India & Ors