Supreme Court Rules on Time-Barred Claims: MSMEs Can Still Settle Delayed Payments Through Conciliation

The Hon'ble Supreme Court of India in M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai & Ors. (2025 INSC 864) held that the Limitation Act does not apply to conciliation proceedings under Section 18(2) of the MSMED Act, 2006, and time-barred claims can be referred to conciliation. However, the Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act.

Facts of the Case

1. The appellants were small-scale industries registered with the District Industries Centre, Nagpur. The appellants supplied transformers to the first Respondent under various purchase orders between 1993 to 2004. Due to delay in payments by the Respondent, the appellants filed references in 2005-06 before the Industry Facilitation Council established under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (the 1993 Act). The 1993 Act came to be repealed by the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), and the proceedings initiated by the appellants were taken up by the Micro and Small Enterprises Facilitation Council under the MSMED Act. Section 32 of the MSMED Act provided that anything done or any action taken under the 1993 Act shall be deemed to have been done or taken under the corresponding provisions of the MSMED Act.

2. By its award dated January 28, 2010, the Facilitation Council allowed the appellants' claims and awarded interest on the delayed payments. The first and second Respondents challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (ACA), and deposited the requisite amount under Section 19 of the MSMED Act. This challenge was allowed by the Commercial Court by order dated October 26, 2017 and it set aside the award on the ground that the claims were barred by limitation. Against this order, the appellants filed appeals under Section 37 of the ACA before the High Court.

3. On taking up these appeals under Section 37, the division bench referred the issue of applicability of Limitation Act to proceedings under the MSMED Act to a larger bench. The division bench took note of a coordinate bench's decision in M/s. Delton Electricals v. MSEDCL (Commercial Appeal No. 38/2017, judgment dated August 31, 2017) wherein the High Court found that the law of limitation applies to claims filed before the Facilitation Council. In Delton's case, the Court held that by virtue of Section 2(4) of the ACA, which excludes the applicability of Section 43 of the ACA to statutory arbitrations, the Limitation Act was inapplicable to arbitrations under the MSMED Act. However, analysing the issue from a different perspective and interpreting the term "amount due" in the scheme of the MSMED Act, the High Court relied on the Supreme Court's decision in State of Kerala v. V.R. Kalliyanikutty and held that "amount due" does not include a time-barred debt. On this basis, the High Court therein set aside the award of the Facilitation Council that allowed time-barred claims as being violative of public policy.

4. However, the division bench in the order dated August 24, 2018, doubted the correctness of the interpretation of "amount due" in Delton's case as various aspects were not considered by the Court therein, and it framed 9 issues for consideration by a larger bench. These issues included whether the jurisdiction of Civil Court is taken away by the MSMED Act, whether an incongruous situation would emerge due to reading of provisions of the 1993 Act and Section 18 of the MSMED Act, whether the period of limitation runs from the appointed date only to find out limitation for cause of action to approach Council under Section 18, whether Section 21 of the ACA has any relevance in the scheme of Section 18 of the MSMED Act, whether the peculiar provisions like "thrice the bank rate of interest", interest compounded monthly, direction to mention principal, interest and amount unpaid in balance sheet by buyer, step by step approach adopted in Section 18 and overriding effect in Section 24 of the MSMED Act are sufficient to exclude the applicability of the Limitation Act, whether the mention of "unpaid amount" in balance sheet of the buyer must include "time barred" claims, what is the legislative intent in mandating the mention of "unpaid amount" or even time-barred recoveries separately, whether such disclosure gives rise to fresh or repeated annual causes of action for recovery, and whether the present controversy needs to be viewed independent of the 1993 Act.

5. By judgment dated October 20, 2023, a full bench of the High Court framed two specific issues for its consideration: (1) Whether the provisions of Indian Limitation Act, 1963 are applicable to conciliation proceedings initiated and conducted under Section 18 (1) & (2) of MSMED Act, 2006? (2) Whether the provisions of Indian Limitation Act, 1963 are applicable to arbitration proceedings under Section 18(3) of MSMED Act, 2006?

6. Taking up the second question on the applicability of the Limitation Act to arbitration proceedings under Section 18(3) of the MSMED Act, the High Court relied on the Supreme Court's decisions in Silpi Industries and Mahakali Foods and the overriding effect of the MSMED Act as provided under Section 24 therein. The High Court held that Sections 15 to 23 of the MSMED Act will override Section 2(4) of the ACA. The language of Section 18, which commences with a non-obstante clause, fortifies this position. Therefore, the conduct of arbitration under the MSMED Act will be guided by Section 18(3), which makes the entirety of the ACA, including Section 43, applicable to arbitrations under the MSMED Act. The Court noted that taking an alternative view would permit time-barred and stale claims to be raised in arbitration under the MSMED Act, which is contrary to the purpose and object of the statute to provide speedy remedy to the supplier to recover his claims. The Court analysed the scheme of the MSMED Act and observed that the statute prescribes time-limits for payment under Section 15, provides for a penal rate of interest in case of default under Section 16, and also provides a time-limit for the Facilitation Council to decide the reference under Section 18(5). The prescription of such timelines shows that the legislature did not intend for time-barred claims to be raised in arbitration under Section 18(3).

7. With respect to conciliation under Sections 18(1) and 18(2) of the MSMED Act, the High Court noted that there is no provision that extends the Limitation Act to conciliation proceedings. It also noted that conciliation is mandated under the MSMED Act when a reference is made before the Facilitation Council, and Section 18 has done away with the requirement of consent for conciliation that is required under the ACA. In case conciliation fails, the Facilitation Council can take up the dispute for arbitration or refer it to an institution or centre. Taking into account the purpose and object of the MSMED Act to provide a more robust mechanism for recovery of "amount due" to the supplier, the Court held that the MSMED Act does not create any "special right" in favour of the supplier and the right of recovery of the amount is the same as available under common law. In this light, it relied on the Supreme Court's decisions in V.R. Kalliyanikutty and A.P. Power Coordination Committee v. Lanco Kondapalli Power Ltd. to hold that "amount due" does not include a time-barred, stale and dead claim. The High Court noted that if this were the legislative intent, there must be a specific provision enacted to this effect. Further considering the compulsory nature of statutory conciliation, the buyer must be allowed to take the defence of limitation. Hence, although the Limitation Act does not apply to conciliation proceedings, the Facilitation Council cannot entertain a dead or stale claim.

8. The appellants were aggrieved by this decision of the High Court as it prevented them from pursuing their time-barred claims through both conciliation and arbitration mechanisms under the MSMED Act, despite having supplied goods and services between 1993 to 2004 and being entitled to delayed payment interest under the statute.

Issue

Whether the provisions of the Limitation Act, 1963 are applicable to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, and whether time-barred claims can be referred to such proceedings.

Held by the Court

The Hon'ble Supreme Court of India in M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai & Ors. (2025 INSC 864) held that:

Regarding Conciliation Proceedings:

• The Court extensively analysed the nature and characteristics of conciliation as a dispute resolution mechanism and held that conciliation is not an adjudicatory or judicial process where the conciliator hears the parties and decides a dispute. The Court observed that the parties to the conciliation resolve their disputes through settlement, whose terms may be arrived at with the assistance of the conciliator. The role of the conciliator is to guide and assist the parties in arriving at a compromise or settlement, make proposals for settlement, formulate the terms of settlement or assist the parties in doing so, and reformulate the terms of settlement based on the observations of the parties.

• The Court held that the conciliator must be guided by the principles of independence, impartiality, objectivity, justice, equity, fair play, fairness, and confidentiality, and must also consider the rights and obligations of the parties, trade usages, and business practices between the parties, taking into account the wishes of the parties and the need for speedy settlement of dispute. The Court noted that the parties must also cooperate with the conciliator in good faith and endeavour to comply with the conciliator's requests, and finally, the terms of the settlement that are recorded in a settlement agreement must be signed by the parties and it shall be final and binding on them, being enforceable as an arbitral award.

• The Court held that Section 18(2) of the MSMED Act provides that conciliation must be conducted as per Sections 65 to 81 of the ACA, and on perusing these provisions of the ACA, as well as the provisions of the MSMED Act, it is clear that there is no provision that extends the applicability of the Limitation Act to conciliation proceedings. The Court observed that neither Section 29(2) nor any other provision of the Limitation Act has the effect of extending its application to conciliation proceedings. The Court opined that it is a settled position that the Limitation Act only applies to suits, appeals, and applications filed before courts, and conciliation being an out-of-court and non-adjudicatory process of dispute resolution, the Limitation Act cannot be extended to it.

• The Court examined the High Court's reliance on V.R. Kalliyanikutty case and distinguished it from the present context. The Court held that the decision in V.R. Kalliyanikutty does not apply to conciliation proceedings under Section 18(2) of the MSMED Act for several reasons.

Firstly, one of the considerations in V.R. Kalliyanikutty was that the recovery process under the Kerala Revenue Recovery Act was a judicial process, and it would hence attract the law of limitation, however, conciliation is not an adjudicatory or judicial process. Secondly, while Section 18(2) of the MSMED Act does away with the requirement of consent for conciliation and statutorily mandates the Facilitation Council and parties to explore conciliation for dispute resolution, the ultimate outcome of conciliation remains entirely dependent on the parties. The Court observed that Sections 65 to 81 of the ACA apply to conciliation proceedings under the MSMED Act as per Section 18(2), the parties must be agreeable to the terms of settlement, the conciliator cannot and must not coerce the parties to agree to certain terms or settle the dispute, and ultimately, if the parties are not willing to amicably settle the dispute, either or both of them can terminate the conciliation proceedings as per Section 76 of the ACA. Hence, conciliation cannot be termed as a "coercive" process, which was another consideration of the Court in V.R. Kalliyanikutty.

• The Court held that it is a settled position of law that the statute of limitation only bars the remedy, but does not extinguish the underlying right, which in this case is the right to recover the unpaid amount and interest thereon. The Court observed that the right to recover of the creditor/supplier and the corresponding liability of the debtor/buyer to repay the amount subsists even after the expiry of the limitation period. The Court held that the creditor can recover a time-barred debt, other than through remedies through a court of law, such as by adjusting payments from the debtor made without direction on how it must be appropriated, recovering the amount from a surety/guarantee, or enforcing lien or security.

• The Court noted that the parties may also enter into a contract for repayment of a time-barred debt, which is recognised under Section 25(3) of the Contract Act. The Court opined that a settlement agreement for a time-barred claim arrived at between the buyer and supplier through conciliation under Section 18(2) is precisely in the nature of a contract recognised and declared valid under Section 25(3) of the Contract Act. The Court held that although certain remedies are no longer available in law to the creditor once the limitation period expires, the creditor can adopt other methods, including contractual agreements, to recover time-barred debts, and conciliation as a dispute-resolution process only facilitates the parties in arriving at such a contract or settlement agreement.

Regarding Arbitration Proceedings:

• The Court examined the applicability of the Limitation Act to arbitration proceedings under Section 18(3) of the MSMED Act and considered the correctness of the Supreme Court's decision in Silpi Industries. The Court noted that in Silpi Industries, the Court took note of the statement and objects of the MSMED Act and the scheme for recovery of delayed payments under Chapter V, specifically Sections 15 to 18, and relied on Section 43 of the ACA, which extends the applicability of the Limitation Act to arbitration proceedings. Since Section 18(3) of the MSMED Act mandates arbitration upon failure of conciliation, and makes the provisions of the ACA applicable as if there were an arbitration agreement between the parties, the Court in Silpi Industries held that Section 43 of the ACA is also applicable.

• The Court examined the appellants' contention that Silpi Industries was per incuriam for two reasons: first, Section 2(4) of the ACA that excludes the applicability of Section 43 of the ACA to statutory arbitrations was not brought to the notice of the Court, and second, the Court relies on Lanco case, which is itself per incuriam as it is directly contrary to an earlier coordinate bench decision in T.N. Generation & Distribution Corpn. Ltd. v. PPN Power Generating Co. (P) Ltd. The Court observed that the significance of Section 43 of the ACA has been explained as making the provisions of the Limitation Act, which are otherwise only applicable to proceedings before courts, applicable to arbitrations, and without the enactment of Section 43, the Limitation Act would not extend to claims filed before arbitral tribunals.

• The Court held that there is a clear and apparent conflict in the manner in which the provisions of the ACA are made applicable - while Section 2(4) provides for the exclusion of Section 43 to statutory arbitrations, Section 18(3) provides for the applicability of all the provisions of the ACA as would apply if there were an arbitration agreement, which includes Section 43. The Court opined that Section 18(3) of the MSMED Act will prevail over Section 2(4) of the ACA because there is a clear legislative intent that the provisions of the MSMED Act will have an overriding effect in case of inconsistency, which is evidenced from the non-obstante clause in Section 18 and the express language in Section 24. The Court noted that the language of Section 2(4) itself also supports this overriding effect of the special law, and the same has also been recognised and affirmed by the Supreme Court in Mahakali Foods, wherein the Court considered the purpose and object, statutory scheme, and sequence of enactment of the ACA and the MSMED Act to arrive at the conclusion that the MSMED Act is a special law that will prevail over the provisions of the ACA, which is a general law.

• The Court held that the applicability of the ACA to arbitrations under the MSMED Act is not determined by Section 2(4) of the ACA, and is rather determined as per Section 18(3) of the MSMED Act. The Court observed that 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 when there is an arbitration agreement, and this includes Section 43, thereby making the Limitation Act applicable to arbitral proceedings under the MSMED Act. The Court held that although the Court in Silpi Industries did not consider Section 2(4) while arriving at its decision, the Court provided reasons for why it will not be applicable, and therefore rejected the submission by the appellants that Silpi Industries is per incuriam on this ground and affirmed the applicability of the Limitation Act to arbitrations under Section 18(3), by virtue of Section 43.

• The Court also examined the second contention regarding Lanco being per incuriam and contrary to TANGEDCO, and held that the issue of limitation as well as the interpretation of Section 2(4) and the applicability of Section 43 of the ACA to statutory arbitrations under the Electricity Act did not directly arise for consideration in TANGEDCO. The Court noted that this has also been noted by the Supreme Court in Lanco, wherein the issue directly falling for the Court's consideration was whether the Limitation Act applies to actions instituted before the State Commission under the Electricity Act. The Court observed that the Court in Lanco noted that the Limitation Act does not ordinarily apply to proceedings before quasi-judicial bodies or tribunals, however, applying the principle in V.R. Kalliyanikutty, the Court held that Electricity Act does not create a new right to claim amounts that are barred by limitation. The Court held that the decision in Lanco is not per incuriam, and there is no conflict between these judgments, and therefore rejected the submission by the appellant on this ground as well.

Regarding Section 22 of MSMED Act:

• The Court briefly dealt with the contention raised by the appellant that even if the Limitation Act applies to arbitration proceedings, the limitation period stands extended due to the disclosure of unpaid amount in the buyer's financial statements as per Section 22 of the MSMED Act, based on the application of Section 18 of the Limitation Act, which provides that a fresh period of limitation commences when a written acknowledgement of the liability is signed by the party against whom such right is claimed. The Court referred to Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, where the Supreme Court reaffirmed the position that an entry in the balance sheet of the debtor would amount to an acknowledgement of liability as per Section 18 of the Limitation Act. However, the Court also observed that it is not uncommon for such entry to have notes annexed, or the auditor's report that must be read along with the balance sheet, that indicate that such entry does not amount to an acknowledgement of debt for reasons stated therein. The Court held that while the law mandates the preparation of the balance sheet, and in the present case, 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.

Relevant Sections

Section 18 of the MSMED Act, 2006: "(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council. (2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act. (3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer to it any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act. (4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. (5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference."

Section 43 of the Arbitration and Conciliation Act, 1996: "43. Limitations.—(1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in

court."

Section 2(4) of the Arbitration and Conciliation Act, 1996: "(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder."

Section 25(3) of the Indian Contract Act, 1872: "(3) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits."

Section 24 of the MSMED Act, 2006: "24. Overriding effect.— The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."

Section 22 of the MSMED Act, 2006: "22. Requirement to specify unpaid amount with interest in the annual statement of accounts.— Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:— (i)the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year; (ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year; (iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act; (iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and (v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23."

Pari Materia / Cases Referred

1. Silpi Industries v. Kerala SRTC (2021) 18 SCC 790 - Court held that Limitation Act applies to arbitration proceedings under MSMED Act and relied on Section 43 of ACA which extends applicability of Limitation Act to arbitration proceedings.

2. Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd. (2023) 6 SCC 401 - Court recognized overriding effect of MSMED Act over ACA provisions and held that MSMED Act is special law that prevails over ACA which is general law.

3. State of Kerala v. V.R. Kalliyanikutty (1999) 3 SCC 657 - Court held that "amount due" refers to amount which creditor has right to recover and does not include time-barred debt in context of Kerala Revenue Recovery Act.

4. A.P. Power Coordination Committee v. Lanco Kondapalli Power Ltd. (2016) 3 SCC 468 - Court applied principle that Electricity Act does not create new right to claim amounts barred by limitation and held Limitation Act applicable to proceedings before State Commission.

5. T.N. Generation & Distribution Corpn. Ltd. v. PPN Power Generating Co. (P) Ltd. (2014) 11 SCC 53 - Court observed that Section 43 of ACA would not apply due to Section 2(4) in context of arbitration clause governed by English law.

6. State of Punjab v. Jalour Singh (2008) 2 SCC 660 - Court determined meaning and scope of conciliation in context of powers of Lok Adalats under Legal Services Authorities Act, 1987.

7. United India Insurance Co. Ltd. v. Ajay Sinha (2008) 7 SCC 454 - Court explained conciliation as dispute resolution mechanism relying on role of conciliator under Sections 67 and 73 of ACA.

8. Afcons Infrastructure Ltd. & Anr. v. Cherian Varkey Construction Co. (P) Ltd. & Ors. (2010) 8 SCC 24 - Court explained conciliation as ADR remedy under Section 89 of CPC.

9. Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal (2021) 6 SCC 366 - Court held that entry in balance sheet of debtor amounts to acknowledgement of liability under Section 18 of Limitation Act but must be examined case-to-case basis.

10. Consolidated Engineering Enterprises v. Principal Secretary Irrigation Department (2008) 7 SCC 169 - Court explained significance of Section 43 of ACA in making provisions of Limitation Act applicable to arbitrations.

11. M.P. Steel Corpn. v. CCE (2015) 7 SCC 58 - Court held that Limitation Act only applies to suits, appeals, and applications filed before courts.

12. Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 - Court held that creditor can recover time-barred debt through means other than court remedies.

13. Punjab National Bank v. Surendra Prasad Sinha 1993 Supp (1) SCC 499 - Court recognized that time-barred debt can be recovered from surety/guarantee.

14. Prem Cottex v. Uttar Haryana Bijli Vitran Nigam Ltd. (2021) 20 SCC 200 - Court held that limitation only bars remedy but does not extinguish underlying right.

    
    

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