2025 (7) TMI 1204 - SC - Indian Laws

MSMED Act conciliation proceedings exempt from Limitation Act but arbitration proceedings remain subject to limitation

The SC held that the Limitation Act, 1963 does not apply to conciliation proceedings under Section 18(2) of the MSMED Act, 2006, and time-barred claims ... Applicability of provisions of the Limitation Act, 1963 to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 - supplier can recover a time-barred debt by taking recourse to the remedies provisioned under Section 18 of the MSMED Act or not. HELD THAT:- 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. Section 18 which falls for interpretation, provides the remedies for recovery of the “amount due” calculated under Section 17. While dealing with the interpretation of its sub- sections in more detail at a later stage, it is relevant to note the following about the remedial mechanism: first, any party to a dispute with regard to the amount due can make a reference before the Facilitation Council; second, the Facilitation Council shall, on receipt of such reference, conduct conciliation or refer the dispute for conciliation to an institution or centre; third, 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 ACA; fourth, 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; fifth, the provisions of the ACA shall apply to the dispute as if the arbitration was pursuant to an arbitration agreement; sixth, 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 seventh, the reference shall be decided within 90 days of it being made - Section 19 stipulates a pre-deposit requirement for filing an application under Section 34 of the ACA to set aside the award. Section 20 provides for establishment of the Facilitation Council and Section 21 provides for its composition. Whether the Limitation Act applies to conciliation proceedings under Section 18(2) of the MSMED Act, and even if not, whether time-barred claims can be referred to conciliation? - HELD THAT:- While Section 18(2) of the MSMED Act does away with the requirement of consent for conciliation as provided in Section 61 of the ACA 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 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. 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 [1999 (4) TMI 609 - SUPREME COURT]. The recovery process considered in V.R. Kalliyanikutty can be said to stand on a different footing than conciliation under Section 18(2) of the MSMED Act read with Sections 65 to 81 of the ACA. Hence, the decision is inapplicable to the present context. The High Court did not consider these aspects of the matter, and rather relied on the compulsory nature of conciliation under Section 18(2) as well as the object of speedy recovery under the MSMED Act to hold that time-barred claims cannot be referred to conciliation. 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 - The High Court did not fully appreciate this aspect and rather relied on the object of speedy recovery to arrive at its conclusion. In doing so, it lost sight of the forest for the trees and entirely foreclosed a beneficial mechanism made available to the supplier under the MSMED Act, and more generally recognised in law, to recover the amounts due to him even if they are time- barred. 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. Whether time-barred claims can be referred to arbitration under Section 18(3) of the MSMED Act? - HELD THAT:- In Silpi Industries [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 MSMED 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 ACA, wherein the High Court held that the Limitation Act is applicable to arbitration claims under the MSMED Act. In the suppliers’ appeals, this Court considered the issue of whether the provisions of the Limitation Act apply to arbitration proceedings initiated under Section 18(3) of the MSMED Act, which is the very issue arising for consideration. 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 - Section 18(3) of the MSMED Act will prevail over Section 2(4) of the ACA. 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 language of Section 2(4) itself also supports this overriding effect of the special law. 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. 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 MSMED Act. Appeal allowed in part. ISSUES: Whether the provisions of the Limitation Act, 1963 apply to conciliation proceedings initiated under Section 18(2) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).Whether time-barred claims can be referred to conciliation under Section 18(2) of the MSMED Act.Whether the provisions of the Limitation Act, 1963 apply to arbitration proceedings under Section 18(3) of the MSMED Act.Whether time-barred claims can be referred to arbitration under Section 18(3) of the MSMED Act.The effect of disclosure of unpaid amounts in the buyer's financial statements under Section 22 of the MSMED Act on the limitation period for recovery of claims. RULINGS / HOLDINGS: The Limitation Act does not apply to conciliation proceedings under Section 18(2) of the MSMED Act because conciliation is a non-adjudicatory, out-of-court dispute resolution process.Time-barred claims can be referred to conciliation under Section 18(2) of the MSMED Act; the expiry of the limitation period does not extinguish the underlying right to recover the amount, including through a settlement agreement arrived at by conciliation.The Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act by virtue of Section 43 of the Arbitration and Conciliation Act, 1996 (ACA), as incorporated through Section 18(3) of the MSMED Act, which overrides Section 2(4) of the ACA.Time-barred claims cannot be referred to arbitration under Section 18(3) of the MSMED Act as such claims are barred by limitation and the Limitation Act applies to arbitration proceedings.The effect of disclosure of unpaid amounts in the buyer's financial statements under Section 22 of the MSMED Act on extending the limitation period must be examined on a case-to-case basis, applying the principles of Section 18 of the Limitation Act regarding acknowledgment of liability in writing. RATIONALE: The Limitation Act applies strictly to suits, appeals, and applications filed before courts; conciliation being a non-coercive, non-adjudicatory process aimed at amicable settlement does not attract the Limitation Act. This is supported by the statutory framework of Sections 65 to 81 of the ACA and the nature of conciliation as explained in precedents.The term 'amount due' under Sections 17 and 18 of the MSMED Act includes amounts recoverable by the supplier but does not exclude time-barred debts from conciliation, as limitation bars the remedy but not the underlying right. Settlement agreements under conciliation are contracts enforceable under Section 25(3) of the Indian Contract Act, 1872, which recognizes promises to pay time-barred debts.Section 18(3) of the MSMED Act contains a non-obstante clause and a deeming fiction that arbitration under the MSMED Act is 'as if the arbitration was in pursuance of an arbitration agreement' under Section 7(1) of the ACA, thereby incorporating Section 43 of the ACA which makes the Limitation Act applicable to arbitration proceedings.Section 2(4) of the ACA excludes Sections 40(1), 41, and 43 from statutory arbitrations generally, but the MSMED Act's specific provision (Section 18(3)) and overriding effect clause (Section 24) prevail over this general exclusion, as affirmed by this Court's precedents including Silpi Industries and Mahakali Foods.Judicial precedents such as V.R. Kalliyanikutty and Lanco Kondapalli Power Ltd. establish that statutory adjudicatory bodies cannot entertain time-barred claims, supporting the applicability of the Limitation Act to arbitration under the MSMED Act.Section 22 of the MSMED Act requires disclosure of unpaid amounts in the buyer's audited financial statements to promote transparency and accountability but does not per se extend or reset limitation periods; whether such disclosure constitutes a written acknowledgment under Section 18 of the Limitation Act requires fact-specific inquiry.