Can time-barred claims be referred to conciliation or arbitration under Section 18 of MSMED Act?

The Supreme Court’s judgment in Sonali Power Equipments Pvt. Ltd. v. MSEB & Ors. brings much-needed clarity to a long-contested issue under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”): Can time-barred claims be referred to conciliation or arbitration under Section 18 of the Act?

The Court’s nuanced view outlines the procedural frameworks applicable to conciliation and arbitration, striking a judicious balance between the rights of MSMEs and the statutory framework of limitation.

The appellants, small-scale industries registered with the District Industries Centre, Nagpur, being manufacturers of transformers, had supplied transformers to the Maharashtra State Electricity Board (MSEB) between 1993 and 2004. Facing delays in payment, they initiated claims in 2005–2006 before the Industry Facilitation Council under the erstwhile 1993 Act, later subsumed by the MSMED Act. The Council passed an award in their favour on January 28, 2010, awarding interest on delayed payments.

These awards were set aside by the Commercial Court in 2017 on the ground that the claims were barred by limitation. The High Court upheld this view in part, holding that while conciliation proceedings could not entertain time-barred claims, the Limitation Act applied to arbitration under Section 18(3). The matter reached the Supreme Court for a definitive pronouncement.

Prior to this ruling, the jurisprudence around limitation under the MSMED Act was divergent:

1. In Silpi Industries v. Kerala SRTC, the Supreme Court held that the Limitation Act, 1963, applied to arbitration under the MSMED Act, relying on Section 43 of the Arbitration and Conciliation Act, 1996 (“ACA”).

2. Conversely, some High Courts interpreted the term "amount due" narrowly, holding that time-barred debts fall outside the jurisdiction of the MSME Facilitation Council altogether.

3. A full bench of the Bombay High Court in 2023 reiterated that conciliation under Section 18(2) could not be used to circumvent the bar of limitation, while arbitration remained subject to it.

This divergence created uncertainty for MSMEs seeking to enforce delayed payment claims, especially where business relationships had lasted many years and documentation had aged.

The Bench comprising Justice PS Narasimha and Justice Joymalya Bagchi of the Supreme Court has dealt with the issue in two parts:

1. Does the Limitation Act apply to conciliation under Section 18(2)?

Held: No.

The Court clarified that conciliation under Section 18(2) is a non-adjudicatory, voluntary, and non-binding mechanism. Since it does not result in a judicial or quasi-judicial determination, limitation law has no direct application.

The Court held that the parties are free to negotiate and settle even time-barred debts during conciliation. Such settlements are legally valid under Section 25(3) of the Indian Contract Act, which enables parties to agree to pay time-barred debts.

2. Does the Limitation Act apply to arbitration under Section 18(3)?

Held: Yes.

On arbitration, the apex court reaffirmed the view in Silpi Industries (supra), holding that once conciliation fails, and the matter proceeds to arbitration under Section 18(3), the provisions of the ACA, including Section 43, fully apply. Arbitration under Section 18(3) is deemed to arise from an arbitration agreement under Section 7 ACA, invoking the entire framework of the ACA, including limitation.

While the appellants argued that Section 2(4) of the ACA excludes Section 43 for statutory arbitrations, the Court held that Section 18(3) of the MSMED Act overrides this exclusion, due to its non-obstante clause and the overriding provision in Section 24 of the MSMED Act.

The ruling is notable for:

1. Rejecting the High Court's reasoning that the definition of "amount due" excludes time-barred claims from the outset. The Supreme Court clarified that only adjudicatory proceedings (like arbitration) are barred by limitation and not conciliatory mechanisms.

2. Differentiating between "right" and "remedy", reiterating that limitation extinguishes the remedy, not the debt itself, thus preserving the creditor’s right to negotiate payment outside court.

3. Addressing concerns raised in earlier judgments like State of Kerala v. V.R. Kalliyanikutty, the Court clarified that their application is limited to coercive recovery mechanisms, not consensual dispute resolution like conciliation.

The Court also rejected arguments that Silpi Industries (supra) was rendered per incuriam for failing to consider Section 2(4) ACA; it held that Section 18(3) and Section 24 MSMED Act prevail in the interpretive hierarchy.

This ruling settles a previously contentious issue and brings much-needed clarity on the application of limitation to proceedings under the MSMED Act.

• For Suppliers: The judgment underlines the importance of initiating recovery proceedings within the limitation period. Suppliers cannot rely solely on the conciliation mechanism to preserve stale claims.

• For Buyers: The decision offers procedural safeguards against the enforcement of outdated claims and ensures that statutory conciliation/arbitration processes are not misused.

• For Facilitation Councils: The ruling guides Councils to scrutinize claims even at the conciliation stage and reject those that are clearly time-barred.

Crucially, this decision balances the dual objectives of the MSMED Act i.e., speedy resolution and fairness in recovery, with the long-established principles of limitation law, thus preventing the reopening of long-forgotten disputes while preserving legitimate claims.

This ruling is both clarificatory and pragmatic. It prevents misuse of the MSMED framework to revive dead claims through arbitration, thereby protecting buyers from stale liabilities. At the same time, it upholds the protective intent of the MSMED Act by preserving a space for negotiated settlements even in time-barred situations.

From a policy standpoint:

1. MSMEs are incentivised to initiate conciliation early, yet retain an informal route to recovery of old dues.

2. Buyers cannot be dragged into arbitration for stale claims, ensuring certainty and finality in commercial dealings.

3. Financial reporting under Section 22 MSMED Act (disclosure of unpaid dues in balance sheets) does not revive limitation but may assist suppliers during conciliation.

Going forward, this judgment is likely to:

1. Reduce unnecessary litigation on preliminary limitation objections in MSMED arbitration.

2. Increase the use of conciliation as a meaningful step, rather than a procedural formality.

3. Ensure speedy, cost-effective dispute resolution, aligned with the MSMED Act’s objectives.

The Supreme Court has walked a fine line affirming legal discipline in arbitration, while allowing commercial flexibility in conciliation. This balanced interpretation reinforces the MSMED Act as a functional tool for MSMEs, without compromising procedural fairness for buyers. It is now incumbent on both MSMEs and buyers to manage their dispute timelines strategically and to engage with Facilitation Councils constructively.

About the authors: Ishwar Ahuja is a Partner and Nikita Lad is an Associate at Saga Legal.

Zenia Daruwala, Intern, assisted in this article.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.