Supreme Court holds Limitation Act applies to MSMED arbitration but conciliation may resolve time‑barred claims

A bench of Justices Pamidighantam Sri Narasimha and Joymalya Bagchi heard appeals questioning 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), and whether suppliers could recover time‑barred debts through the MSMED remedies.

The Court partly allowed the appeals. It affirmed that the Limitation Act applied to arbitration proceedings under Section 18(3) of the MSMED Act — holding that the statutory deeming‑fiction in Section 18(3) brought arbitral proceedings within the scope of the Arbitration and Conciliation Act and, through Section 43 of that Act, within the Limitation Act. The Court overturned the High Court only insofar as it held that conciliation was necessarily precluded from considering time‑barred claims. The judgment noted that conciliation under Section 18(2) remained an out‑of‑court, consensual settlement process and that time‑barred debts could be resolved by agreement. The Court, in its reasoning, observed: “With respect to conciliation proceedings on the other hand, we are of the opinion that they do not attract the applicability of the Limitation Act. Further, there is no legal bar in the Limitation Act, the MSMED Act, the ACA, or the legal precedents laid down by this Court that proscribes conciliation with respect to time‑barred debts.” The judgment also recorded the view that in earlier authority a court had stated that “amount due does not include a time‑barred debt,” a proposition the Court distinguished for conciliation.

Background The appellants, small‑scale suppliers registered with the District Industries Centre, Nagpur, supplied transformers to the Maharashtra State Electricity Board between 1993 and 2004 and filed references before the Industry Facilitation Council in 2005–06 for delayed payments. After the MSMED Act repealed the earlier 1993 Act, the disputes were pursued before the Micro and Small Enterprises Facilitation Council. The Council awarded sums and interest in 2010. The buyers challenged the award on limitation grounds; a commercial court set aside the award on limitation and the matter reached the Bombay High Court, which convened a full bench and held that the Limitation Act applied to arbitration under the MSMED Act while conciliation could not entertain time‑barred claims. The Supreme Court granted leave.

The Court analysed the MSMED statutory scheme (Sections 15–24), the Arbitration and Conciliation Act (ACA) provisions including Section 2(4) and Section 43, and Limitation Act principles, and reviewed precedents including Silpi Industries and V.R. Kalliyanikutty. It held that Section 18(3)’s non‑obstante language and Section 24’s overriding effect established that provisions of the ACA — including Section 43 which made the Limitation Act applicable to arbitrations — applied to MSMED arbitrations despite Section 2(4) of the ACA generally excluding Section 43 from statutory arbitrations. Conversely, conciliation under Section 18(2) and Part III of the ACA was characterised as non‑adjudicatory, voluntary in outcome and aimed at negotiated settlement; the Court concluded the Limitation Act did not apply to conciliation and that parties could arrive at binding settlement agreements in respect of time‑barred debts (including under the Contract Act provision recognising promises to pay barred debts). The Court clarified that where conciliation failed and arbitration ensued, limitation law governed arbitral proceedings and that any effect of entries in a buyer’s accounts under Section 22 (disclosure of unpaid amount) on limitation must be assessed on the facts of each case.

The appeals were thus partly allowed: the Supreme Court upheld the High Court’s finding that the Limitation Act applied to arbitration under the MSMED Act, but set aside the High Court insofar as it held that conciliation could not entertain time‑barred claims. Pending applications were disposed of; no order as to costs.

Case No.: 2025 INSC 864 (Civil Appeal Nos. 9524‑9532 of 2025 arising out of SLP (C) Nos. 6912‑6920 of 2024) Case Title: M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai & Ors. Appearances: For the Petitioner(s): Dr. Abhishek Manu Singhvi, Senior Advocate; Mr. Jayant Bhushan, Senior Advocate For the Respondent(s): Mr. Shikhil Suri, Senior Advocate