Limitation Act Won't Apply To Conciliation Process Under MSMED Act, But Applies To Arbitration : Supreme Court

The Supreme Court settled an important legal issue regarding the recovery of time-barred payment claims by Micro, Small, and Medium Enterprises (MSMEs) suppliers from large buyers under the MSMED Act.

The Court held that while MSME suppliers may pursue time-barred debts through conciliation proceedings under the Act, such claims cannot be enforced through arbitration, as the Limitation Act applies to arbitration proceedings initiated under the MSMED framework.

The Court reasoned that the limitation act doesn't apply to the conciliation proceedings as Conciliation is a voluntary and settlement-driven process, not adjudicatory in nature. Whereas, arbitration is an adjudicatory proceeding initiated upon filing of the application, making the limitation act applicable on it.

“..it is a settled position that the Limitation Act only applies to suits, appeals, and applications filed before courts. Conciliation being an out-of-court and non-adjudicatory process of dispute resolution, the Limitation Act cannot be extended to it.”, the court said.

“we conclude 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).”, the court held.

The bench comprising Justices PS Narasimha and Joymalya Bagchi heard the case where the Appellant, Sonali Power, a transformer manufacturer, supplied equipment to Maharashtra State Electricity Board (MSEB). With ₹2.7 crore unpaid after delivery, the Appellant struggled through MSEB's bureaucratic delays until 2018, when it approached the MSE Facilitation Council, which refused to allow the claim holding that the claim was barred by limitation.

Aggrieved by the High Court's decision upholding the Facilitation Council's view, the Appellant approached the Supreme Court.

Partly allowing the appeal, the judgment authored by Justice Narasimha upheld the decision of the High Court to the extent of the Limitation Act being applicable to arbitration proceedings under the MSMED Act. However, with respect to conciliation proceeding, it opined that they do not attract the applicability of the Limitation Act.

The Court said that even though the remedy of seeking time barred payment under the Arbitration framework extinguishes, the MSME supplier can seek remedy via Conciliation because of non-applicability of the limitation act.

The Court observed as follows:

"i. The 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.

ii. The Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act. The applicability of the provisions of ACA to such arbitrations is determined as per Section 18(3) and other provisions of the MSMED Act, as these are special laws, rather than by Section 2(4) of the ACA, which is under a general law. This is in addition to the reasoning provided in Silpi Industries (supra). Further, 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.”

Cause Title: M/S SONALI POWER EQUIPMENTS PVT. LTD. VERSUS CHAIRMAN, MAHARASHTRA STATE ELECTRICITY BOARD, MUMBAI & ORS.

Citation : 2025 LiveLaw (SC) 721

Click here to read/download the judgment

Appearance:

For Petitioner(s) : Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Jayant Bhushan, Sr. Adv. Mr. Prashant Pakhiddey, 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. Anup Jain, Adv. Ms. Prachi Gupta, Adv. Ms. Nishtha Goel, Adv. Mr. Amarendra Kumar, Adv. M/S. Udit Kishan And Associates, AOR