SC Clarifies Section 18 of MSMED Act: Limitation Act Applies to Arbitration, Not Conciliation, in Time-Barred Claims

The Supreme Court clarified that under Section 18 of the MSMED Act, the Limitation Act applies to arbitration proceedings but not to conciliation, thereby holding that time-barred claims cannot be pursued through arbitration.

In a significant ruling, the Supreme Court Bench comprising Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi, while adjudicating a batch of civil appeals arising out of multiple SLPs, held that arbitration proceedings under Section 18(3) of the MSMED Act are governed by the Limitation Act, 1963, by virtue of the legal fiction created under Section 18(3) and the overriding effect of Section 24. In contrast, conciliation proceedings under Section 18(2), being non-adjudicatory in nature, are not subject to the Limitation Act, and time-barred claims may validly be resolved through such conciliation.

The Supreme Court, in a significant ruling, examined whether the Limitation Act, 1963, applied to conciliation and arbitration proceedings under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The dispute arose from claims made by small-scale industries that had supplied transformers between 1993 and 2004, seeking recovery through the Facilitation Council. Although an arbitral award was passed in their favour, a Commercial Court later set it aside on limitation grounds, prompting appeals and a reference by the High Court to a larger bench. The High Court concluded that the Limitation Act applied to arbitration under Section 18(3), but not to conciliation under Sections 18(1) and (2), though it disallowed time-barred claims even at the conciliation stage.

On appeal, the Supreme Court upheld the High Court’s finding that arbitration under Section 18(3) of the MSMED Act attracted the provisions of the Limitation Act. It held that Section 18(3), by deeming the arbitration as if it arose under a valid agreement, incorporated the Arbitration and Conciliation Act, 1996 (ACA), including Section 43, which makes the Limitation Act applicable to arbitrations. The Court also reinforced the legislative intent underlying the MSMED Act through its overriding clause in Section 24, holding that Section 18(3) prevails over Section 2(4) of the ACA. The Court rejected the argument that Silpi Industries etc. v. Kerala State Road Transport Corporation and Another etc., REEDLAW 2021 SC 06039 was per incuriam and found no inconsistency in the reliance on Lanco, distinguishing it from TANGEDCO.

Regarding conciliation, the Supreme Court diverged from the High Court’s conclusion. It held that conciliation under Section 18(2) of the MSMED Act is a non-adjudicatory process and does not fall within the scope of proceedings governed by the Limitation Act. The Court elaborated on the conciliation mechanism under Part III of the ACA, highlighting its voluntary, non-coercive nature. It clarified that while the Limitation Act is not applicable to conciliation, this does not bar parties from entering into a valid settlement even on time-barred claims, relying on Section 25(3) of the Indian Contract Act, which permits a promise to pay a time-barred debt. Accordingly, the Court found that time-barred claims can be the subject of a settlement agreement under conciliation.

Further, the Court observed that even though conciliation could include time-barred claims, once the matter is referred to arbitration under Section 18(3), the Limitation Act would be applicable, and any stale claim would be barred unless extended by acknowledgement under Section 18 of the Limitation Act. The Court noted that disclosures in financial statements under Section 22 of the MSMED Act could, in certain circumstances, amount to an acknowledgement of liability and restart the limitation period, depending on their contents and context.

The Supreme Court, therefore, partly allowed the appeals, setting aside the High Court’s decision only to the extent it disallowed conciliation on limitation grounds. However, it affirmed the High Court’s finding that arbitration under the MSMED Act is subject to the Limitation Act. This ruling clarified the dual-track applicability of limitation principles: permitting time-barred claims in conciliation while barring them in arbitration unless saved by acknowledgement, thereby preserving the remedial balance envisioned under the MSMED Act.

Dr. Abhishek Manu Singhvi and Mr. Jayant Bhushan, Senior Advocates, represented the Appellant.

Mr. Shikhil Suri, Senior Advocate, appeared for the Respondents.

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