The Supreme Court rules that time-barred MSE debts under the MSMED Act can be referred to conciliation but not arbitration, clarifying the applicability of the Limitation Act.
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NEW DELHI: In a crucial ruling that clarifies the interplay between the Limitation Act, 1963, and the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), the Supreme Court of India has held that time-barred debt disputes involving Micro, Small and Medium Enterprises (MSEs) can be referred to conciliation under Section 18(2) of the MSMED Act but cannot be referred to arbitration under Section 18(3).
The case revolved around whether time-barred claims can be adjudicated or resolved under the MSMED Act. The petitioner, Sonali Power, challenged the legal standing of earlier rulings that applied the Limitation Act to arbitration proceedings conducted under the MSMED framework.
The Bench of Justices P S Narasimha and Joymalya Bagchi provided a detailed interpretation of the statutory provisions and applicable precedents.
Court’s Observation
The Supreme Court, in a landmark ruling, clarified that conciliation proceedings under Section 18(2) of the MSMED Act are non-adjudicatory and out-of-court in nature, and therefore, not subject to the Limitation Act, 1963.
The Court held that the expiry of the limitation period does not extinguish the underlying right to recover a debt, thereby allowing parties to settle even time-barred claims through conciliation. In support of this, the Court invoked Section 25(3) of the Indian Contract Act, 1872, which validates a written promise to pay a time-barred debt, affirming the legal enforceability of settlements reached during conciliation.
“A settlement agreement for a time-barred claim arrived at between the buyer and supplier through conciliation under Section 18(2) is precisely in the nature of a contract recognised and declared valid under Section 25(3) of the Contract Act.
However, in contrast, the Court ruled that arbitration under Section 18(3) of the MSMED Act is an adjudicatory process, and therefore, the Limitation Act applies as per Section 43 of the Arbitration and Conciliation Act, 1996.
“The Court took note of the statement and objects of the MSMED Act and the scheme for recovery of delayed payments under Chapter V, specifically Sections 15 to 18. It then relied on Section 43 of the ACA, which extends the applicability of the Limitation Act to arbitration proceedings. Since Section 18(3) of the MSMED Act mandates arbitration upon failure of conciliation, and makes the provisions of the ACA applicable as if there were an arbitration agreement between the parties, this Court held that Section 43 of the ACA is also applicable.”
Consequently, time-barred claims cannot be enforced through arbitration. The Court also reaffirmed the position taken in Silpi Industries v. Kerala SRTC, dismissing the argument that the judgment overlooked Section 2(4) of the Arbitration Act.
According to the statute, Section 18(3) of the MSMED Act creates a legal fiction, deeming such arbitration as conducted under an agreement and hence, subject to limitation. Although Section 24 of the MSMED Act overrides inconsistent laws, the Court held it does not neutralize Section 43 of the Arbitration Act.
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Moreover, disclosures under Section 22 of the MSMED Act regarding unpaid dues in financial statements do not amount to acknowledgment of liability under Section 18 of the Limitation Act, unless they meet its specific requirements.
The judgment carries far-reaching implications: while MSEs can validly pursue conciliation for time-barred debts and reach binding settlements, they must act swiftly to preserve their arbitral remedies, as arbitration remains subject to limitation law. Corporates and buyers are advised to be vigilant in financial disclosures, since such entries alone may not extend limitation unless legally compliant.
Hence, the appeals arising from SLP (C) Nos. 6912-6920/2024 are partly allowed. The Supreme Court set aside the Bombay High Court’s order dated 20.10.2023 (in Commercial Appeal Nos. 1-9/2018) only to the extent that it had held the Limitation Act applicable to conciliation proceedings under the MSMED Act.
However, the Court upheld the High Court’s view that the Limitation Act does apply to arbitration proceedings under the MSMED Act. All pending applications stand disposed of.
Case Title: Sonali Power vs Chairman, Maharashtra State Electricity Board, Mumbai & Ors
CIVIL APPEAL NOS. 9524-9532 OF 2025
READ JUDGMENT HERE
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