The Supreme Court has ruled that disputes over the recovery of time-barred debts or debts barred by limitation in cases involving micro, medium and small enterprises (MSEs), can be referred to conciliation under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), but not arbitration [Sonali Power vs Chairman, Maharashtra State Electricity Board, Mumbai & Ors].
The Bench of Justices P S Narasimha and Joymalya Bagchi said that disputes over such time-barred debts cannot be referred to arbitration as the Limitation Act, 1963 would apply to arbitration.
"Limitation Act (is) applicable to arbitration proceedings under the MSMED Act ... 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 Court said.
The Court made the observation while dealing with a batch of civil appeals arising out of disputes between Sonali Power Equipments Pvt Ltd and the Maharashtra State Electricity Board regarding delayed payments for the supply of transformers made between 1993 and 2004.
The Court noted that the central issue was whether the Limitation Act, 1963 applies to proceedings under Section 18 (Reference to Micro and small Enterprises Facilitation Council) of the MSMED Act, particularly to conciliation under Section 18(2) and arbitration under Section 18(3).
The top court noted that conciliation is not an adjudicatory or coercive process, and has different in character from arbitration.
“Conciliation being an out-of-court and non-adjudicatory process of dispute resolution, the Limitation Act cannot be extended to it,” the judgment states.
The Court further held that even though a court remedies may be barred in despites that are barred by limitation, the right to recover the debt continues to subsist. It held that conciliation can be invoked in such cases to settle the time-barred dispute.
In this regard, the Bench relied on Section 25(3) of the Indian Contract Act, 1872, which recognises a written promise to pay a time-barred debt.
“A settlement agreement for a time-barred claim arrived at between the buyer and supplier through conciliation… is precisely in the nature of a contract recognised and declared valid under Section 25(3) of the Contract Act,” the judgment said.
Therefore, the Court held that a supplier may validly refer a time-barred claim to conciliation before the Facilitation Council under the MSMED Act and enter into a binding settlement.
"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," it ruled.
On arbitration under Section 18(3), the Supreme Court took a different view. It held that limitation law would apply to such proceedings.
The judgment upheld the view taken in Silpi Industries v. Kerala SRTC, which ruled that Section 43 (Limitation Act shall apply to arbitration) of the Arbitration and Conciliation Act, 1996, will apply to arbitrations under the MSMED Act as well.
The appellant before the Court (Sonali Power) had argued that the Silpi Industries judgment was per incuriam as it did not consider Section 2(4) of the Arbitration Act, which excludes the application of Section 43 to statutory arbitration. The Supreme Court rejected that argument.
The top court reasoned that Section 18(3) of the MSMED Act itself creates a legal fiction treating the arbitration as if it is under an arbitration agreement governed by the Arbitration Act.
“Pursuant to the deeming fiction ingrained in the language of Section 18(3), the arbitration conducted thereunder would attract the provisions that are otherwise applicable… including Section 43,” the judgment reads.
It added,
"The disclosure of the unpaid amount and interest thereon, the entry made therein must be examined on a case-to-case basis to determine whether it amounts to an acknowledgement of debt as per the requirements of Section 18 of the Limitation Act."
The Court also noted that Section 24 of the MSMED Act contains an overriding clause and makes Sections 15 to 23 prevail over inconsistent laws. Therefore, the general exclusion in Section 2(4) of the Arbitration Act cannot be used to defeat the specific language of Section 18(3), the Court stated.
It added that the Limitation Act applies to arbitration because it is an adjudicatory process, and allowing time-barred claims to be enforced through arbitration would defeat the objective of speedy resolution under the MSMED framework.
The Court also considered the role of financial disclosures under Section 22 of the MSMED Act, where buyers are required to show unpaid dues in their annual accounts. The appellant had argued that such entries amounted to an acknowledgement of liability. The Court clarified that these entries alone do not extend limitation unless they satisfy conditions under Section 18 of the Limitation Act.
“The purpose of Section 22 is to promote transparency and accountability… not to alter or extend statutory limitation periods,” the judgment said.
The appeals were partly allowed. The Court upheld the application of the Limitation Act to arbitration under Section 18(3), but held that conciliation proceedings under Section 18(2) can validly deal with time-barred claims.
Senior Advocates Dr. Abhishek Manu Singhvi and Jayant Bhushan appeared for the appellant.
Senior Advocate Shikhil Suri appeared for the respondents.
[Read Judgment]