Limitation Act does not apply on Conciliation proceedings: Supreme court allows conciliation u/s 18(2) of MSMED Act [Read Judgement]

The Supreme Court has held that 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 the 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.

A two-judge bench of Justice Pamidighantam Sri Narasimha, Justice Joymalya Bagchi upheld the decision of the High Court to the extent of the Limitation Act being applicable to arbitration proceedings under the MSMED Act and have provided our reasons for the same. With respect to conciliation proceedings on the other hand,held that they do not attract the applicability of the Limitation Act.

Sonali Power Equipments Pvt. Ltd, the appelllant’s issue was 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.

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Further, even if the Limitation Act is not applicable, whether a supplier can recover a time-barred debt by taking recourse to the remedies provisioned under Section 18 of the MSMED Act. A full bench of the High Court has held that the Facilitation Council cannot entertain time-barred claims for conciliation, and that the provisions of the Limitation Act are applicable to arbitration proceedings under the MSMED.

The appellants are small-scale industries registered with the District Industries Centre, Nagpur. The appellants supplied transformers to respondent no. 1 under various purchase orders between 1993 to 2004. Due to delay in payments, 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 The 1993 Act came to be repealed by the MSMED Act, 2006 , and the proceedings initiated by the appellants were taken up by the Micro and Small Enterprises Facilitation Council under the MSMED Act.

With respect to conciliation under Sections 18(1) and 18(2) of the MSMED Act, the 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.

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In case conciliation fails, the Facilitation Council can take up the dispute for arbitration or refer it to an institution or centre. Further, 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.

The language of Section 18(3) of the MSMED Act provides for the applicability of the ACA to arbitrations under it as if the arbitration was in pursuance of an arbitration agreement under Section 7(1) of the ACA. Hence, the statutory fiction places arbitration under the MSMED Act on the same footing as those under the ACA and incorporates the entirety of the ACA, including Section 43.

The court viewed that Section 18(2) of the MSMED Act provides that conciliation must be conducted as per Sections 65 to 81 of the ACA. 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. Further, neither Section 29(2) nor any other provision of the Limitation Act has the effect of extending its application to conciliation proceedings.

On the other hand, it is a settled position that the Limitation Act only applies 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.

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The bench held that 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.

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.

The bench partly allowed the present appeals and set aside the impugned order dated 20.10.2023 arising in Commercial Appeal Nos. 1-9/2018 before the High Court of Bombay Bench at Nagpur to the extent of applicability of the Limitation Act to conciliation proceedings under the MSMED Act.

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