APPLICATION OF LIMITATION TO THE ARBITRATION UNDER MICRO, SMALL AND MEDIUM ENTERPRISES ACT

Section 3 of the Limitation Act provides that when a suit, appeal, or application is filed after the prescribed period of limitation as per the Schedule, the same shall be dismissed even if limitation is not set up as a defence. The calculation of the limitation period is subject to Sections 4 to 24 of the Limitation Act. Further, Section 29(2) of the Limitation Act makes its provisions applicable to special or local laws when they prescribe a different period of limitation than what is provided in the Schedule. In such a situation, Section 3 will apply as if such period were prescribed in the Schedule, and Sections 4 to 24 will apply to the extent that they are not impliedly or expressly excluded by the local or special law.

The ‘Micro, Small and Medium Enterprises Development Act, 2002’ (‘Act’ for short) was enacted to promote and develop micro, small, and medium enterprises (MSMEs) in India and enhance their competitiveness. It provides a legal framework for the growth and development of these enterprises, covering aspects like registration, financial assistance, and dispute resolution. Chapter V of the Act provides for the treatment of delayed payments to micro and small enterprises.  Section 18 of the Act provides for the reference of the dispute to the MSE Facilitation Council (‘Facilitation Council’ for short).

The following are the remedial mechanism available under the Act-

• any party to a dispute with regard to the amount due can make a reference before the Facilitation Council;
• the Facilitation Council shall, on receipt of such reference, conduct conciliation or refer the dispute for conciliation to an institution or centre;
• such conciliation shall be conducted as per Sections 65 to 81 of the ACA as if the conciliation is initiated under Part III of the Arbitration and Conciliation Act, 1996;
• in case of failure and termination of conciliation without any settlement, the Facilitation Council shall either take up the dispute for arbitration or refer it to any institution or centre for arbitration;
• the provisions of the Arbitration and Conciliation Act shall apply to the dispute as if the arbitration was pursuant to an arbitration agreement;
• notwithstanding any other law, the Facilitation Council can act as a conciliator and arbitrator in the dispute when the supplier is located in its jurisdiction; and
• the reference shall be decided within 90 days of it being made.

Application of limitation on conciliation under the Act

While Section 18(2) of the Act does away with the requirement of consent for conciliation as provided in Section 61 of the Arbitration and Conciliation Act 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. Sections 65 to 81 of the Arbitration and Conciliation Act apply to conciliation proceedings under the 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. 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 Arbitration and Conciliation Act.  Hence, conciliation cannot be termed as a “coercive” process.

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. It is clear 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. Conciliation as a dispute-resolution process only facilitates the parties in arriving at such a contract or settlement agreement. 

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). In case such settlement is not reached between the parties and the conciliation proceedings are terminated for this reason, the matter must be referred to arbitration as per Section 18(3), which we will deal with presently.

As such the Limitation Act does not apply to conciliation proceedings under Section 18(2) of the 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.

In M/s. Silpi Industries etc. and M/s. Khyaati Engineering Versus Kerala State Road Transport Corporation & Anr. etc. and Prodigy Hydro Power Pvt. Ltd. - 2021 (6) TMI 1119 - Supreme Court, the Court was faced with a similar fact-situation wherein the suppliers initially approached the Industrial Facilitation Council under the 1993 Act for recovery of time-barred claims. As conciliation failed, the claims were decided by the Facilitation Council under the Act and it made arbitral awards in favour of the suppliers. The buyer/respondent therein challenged the award under Sections 34 and 37 of the Arbitration and Conciliation Act, wherein the High Court held that the Limitation Act is applicable to arbitration claims under the Act.  The Supreme Court upheld the order of the High Court.

There is a clear and apparent conflict in the manner in which the provisions of the Arbitration and Conciliation Act 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 Arbitration and Conciliation Act as would apply if there were an arbitration agreement, which includes Section 43 - Section 18(3) of the Act will prevail over Section 2(4) of the Arbitration and Conciliation Act. There is a clear legislative intent that the provisions of the 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 language of Section 2(4) itself also supports this overriding effect of the special law.

The applicability of the Arbitration and Conciliation Act to arbitrations under the MSMED Act is not determined by Section 2(4) of the Arbitration and Conciliation Act, and is rather determined as per Section 18(3) of the 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 when there is an arbitration agreement. This includes Section 43, thereby making the Limitation Act applicable to arbitral proceedings under the Act.