TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1204
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......................................6 V. Submissions .......................................................11 VI. Issues .......................................................15 VII. Relevant statutory provisions: .......................................................17 VIII. Whether time-barred claims can be referred to conciliation under Section 18(2) of the MSMED Act: .......................................................26 IX. Whether time-barred claims can be referred to arbitration under Section 18(3) of the MSMED Act: ...................................................... 35 X. Conclusion .......................................................49 1. Leave granted. I. Introduction: 2. The issue arising in the present appeals are whether the provisions of the Limitation Act, 19631 are applicable to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 20062. 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. In the order impugned before us in the present appeal....
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....s under the MSMED Act to a larger bench. It took note of a coordinate bench's decision in M/s. Delton Electricals v. MSEDCL7 wherein the High Court found that the law of limitation applies to claims filed before the Facilitation Council. The High Court took a different view and referred the issue to a larger bench for the following reasons: 4.1 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 this Court's decision in State of Kerala v. V.R. Kalliyanikutty8 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. 4.2 In the order dated 24.08.2018, the division bench doubted the correctness of the interpretation of "amount due" in Delton's (supra) case as various aspects were not considered....
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....he applicability of the Limitation Act to arbitration proceedings under Section 18(3) of the MSMED Act, the High Court proceeded as follows. Relying on this Court's decision in Silpi Industries9 and Mahakali Foods10 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. Further, 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 also 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-li....
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....conciliation and arbitration under Section 18 of the MSMED Act, it would lead to an incongruous situation where a suit before the civil court for recovery of money would be rejected on the ground of limitation but the same can be claimed under Section 18 a number of years after the supply. Issue C: Limitation commences from the date provided under Section 15 of the MSMED Act. Issue D: Section 21 of the ACA does not have relevance as conciliation and arbitration are statutorily provided under Section 18 when a supplier makes a reference before the Facilitation Council. Issue E: Section 22 of the MSMED Act mandates the buyer to make entries in its books of account to ensure that the remedy under Section 18 is a speedy remedy, and therefore supports the plea that the Limitation Act applies. Issues F and G: Section 22 does not have the effect of permitting dead and stale claims, and the concept of a continuing cause of action cannot be stretched to "an absurd point of time, where its enforcement would make it an engine of oppression and not of providing justice to one". Issue H: The purpose and object of Section 16 read with Sections 22 and 23 is to dissuade the buyer from de....
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....dates the buyer to disclose in its books of accounts the principal amount and interest due thereon that remains unpaid to any supplier. It is submitted that such an entry in the balance sheet or financial statement of the buyer reflecting the unpaid sum is an acknowledgement of debt and extends the period of limitation as per Section 18 of the Limitation Act. Contravention of this requirement is punishable under Section 27 of the MSMED Act. 6.4 The MSMED Act has been enacted with the object of protecting suppliers, and the onus is on the buyers to make payments. Suppliers often do not raise complaints or claims in the fear that it would jeopardise future business with the buyer. No injustice would be caused to the buyer if Limitation Act is not applicable. 6.5 Finally, with respect to conciliation proceedings, it is submitted that the same is to provide an opportunity to parties to explore an amicable settlement. If time-barred claims cannot be referred to conciliation, it would render Section 25(3) of the Indian Contract Act, 187213 otiose, which enables parties to agree to pay time-barred debts. Further, the MSMED Act creates substantive rights beyond establishing a mechanism f....
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....ndered in the context of the 1993 Act. These issues do not directly arise for our consideration in the present appeals and the parties' submissions have been confined to the two legal issues framed by the full bench, as well as brief submissions on the effect of Section 22 of the MSMED Act. In this light, we will confine our examination to the two issues that have been formulated and answered by the High Court and while doing so, we will also briefly deal with Section 22 of the MSMED Act. We may reformulate the issues arising in the present appeals as follows: i. Whether the Limitation Act applies to conciliation proceedings under Section 18 of the MSMED Act, and even if not, whether time-barred debts can be referred to conciliation? ii. Whether the Limitation Act applies to arbitration proceedings under Section 18 of the MSMED Act, and whether time-barred debts can be referred to arbitration? Further, what is the effect of disclosure of the unpaid amount in the buyer's financial statements as mandated under Section 22 on extending the limitation period? VII. Relevant statutory provisions : 9. Before we analyse each issue, it would be relevant to understand the statutory sch....
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....tracted for ready reference: "67. Role of conciliator.- (1) The conciliator shall assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute. (2) The conciliator shall be guided by principles of objectivity, fairness and justice, giving consideration to, among other things, the rights and obligations of the parties, the usages of the trade concerned and the circumstances surrounding the dispute, including any previous business practices between the parties. (3) The conciliator may conduct the conciliation proceedings in such a manner as he considers appropriate, taking into account the circumstances of the case, the wishes the parties may express, including any request by a party that the conciliator hear oral statements, and the need for a speedy settlement of the dispute. (4) The conciliator may, at any stage of the conciliation proceedings, make proposals for a settlement of the dispute. Such proposals need not be in writing and need not be accompanied by a statement of the reasons therefor." 15. Sections 68 to 72 deal with the procedural aspects of conciliation, such as administrative assistance, communic....
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....ultation with the parties, to the effect that further efforts at conciliation are no longer justified, on the date of the declaration; or (c) by a written declaration of the parties addressed to the conciliator to the effect that the conciliation proceedings are terminated, on the date of the declaration; or (d) by a written declaration of a party to the other party and the conciliator, if appointed, to the effect that the conciliation proceedings are terminated, on the date of the declaration." 18. Finally, Chapter V of the MSMED Act that deals with delayed payments to Micro and Small Enterprises is relevant for our purpose. Section 15 imposes obligations on the buyer17 in respect of timelines for payment to the supplier18 as follows- on or before the date agreed upon between the parties in writing, provided that the same does not exceed 45 days from the day of acceptance or the day of deemed acceptance19, or where there is no agreement in this behalf, before the "appointed day"20. Section 15 of the MSMED Act reads: "15. Liability of buyer to make payment.- Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on ....
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....n 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 18 is extracted below for ready reference: "18. Reference to Micro and Small Enterprises Facilitation Council.- (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 o....
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....ciliation has not been defined per se under the ACA or the MSMED Act. Hence, it would be relevant to refer to decisions where the term has fallen for consideration and has been interpreted by this Court. In State of Punjab v. Jalour Singh,22 a 3- judge bench determined the meaning and scope of conciliation in the context of the powers of the Lok Adalats under the Legal Services Authorities Act, 1987. Similarly, in United India Insurance Co. Ltd. v. Ajay Sinha23, this Court relied on the role of the conciliator under Sections 67 and 73 of the ACA to explain conciliation as a dispute resolution mechanism. Finally, in Afcons Infrastructure Ltd. & Anr. v. Cherian Varkey Construction Co. (P) Ltd. & Ors. 24, this Court explained conciliation as an ADR remedy under Section 89 of the CPC. The following features of conciliation can be culled out from these decisions as well as the statutory provisions: i. Conciliation is not an adjudicatory or judicial process where the conciliator hears the parties and decides a dispute.25 ii. 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 ....
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....s reasoning and decision by contrasting the present case with the reasoning in V.R. Kalliyanikutty (supra). 28. In V.R. Kalliyanikutty (supra), a 3-judge bench of this Court examined whether time-barred claims of the State Financial Corporation and banks can be recovered through recourse to the mechanism under the Kerala Revenue Recovery Act, 1968. For this purpose, the Court interpreted the term "amount due" appearing in Section 71 of that Act, and whether it would include time-barred claims.35 The Court held that "amount due" refers to an amount which the creditor has a right to recover, and does not include a time-barred debt.36 The Court considered that the Act only provides a special procedure for speedy recovery of these amounts that the creditor can use instead of filing a civil suit. It also noted that the Act did not enlarge the existing right of recovery, but only provisioned a different process for recovery.37 This process of recovery is also a judicial process and is coercive in nature.38 Hence, the Court held that the same would attract the law of limitation.39 It also observed that the application of limitation law would advance the public interest of the Act, i.e., ....
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....ion and avail the remedy of arbitration provided in Section 18(3), wherein they can raise all defences available to them in law. Considering that conciliation is non-adjudicatory by nature and is rather based on negotiation, compromise, and settlement by the parties, it is not necessary that the defence of limitation be available to the parties in this process. 31. There is yet another reason why time-barred claims must not be excluded from conciliation under the MSMED Act. 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 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 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,41 recovering the amount from a surety/ guarantee, or enforcing lien or security.42 Further, the parties may also enter into a contrac....
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....cannot be referred to arbitration. 35. In Silpi Industries (supra), 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,44 which is the very issue arising for our consideration. 35.1 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 18.45 It then 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 up....
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....r Ltd. has held that the Limitation Act, 1963 is applicable to the arbitrations covered by Section 18(3) of the 2006 Act. A reading of Section 43 itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court. When the settlement with regard to a dispute between the parties is not arrived at under Section 18 of the 2006 Act, necessarily, the Micro and Small Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it may refer to institution or centre to provide alternate dispute resolution services and provisions of the Arbitration and Conciliation Act, 1996 are made applicable as if there was an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act." 36. The learned senior counsels on behalf of the appellants have made two submissions regarding the correctness of Silpi Industries (supra), which otherwise lays down the law on this exact issue. The first is that the Court therein did not consider the effect of Section 2(4) of the ACA, which explicitly excludes the applicability of Section 43 to statutory arbitrations, while arriving at its ....
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....ar device of deeming statutory arbitrations as being pursuant to an arbitration agreement, as if the other enactment is an arbitration agreement. By doing so, it extends the applicability of Part I of the ACA to such arbitrations, except certain provisions including Section 43 and except insofar as the provisions of the ACA are inconsistent with the other enactment or rules thereunder. Two things are relevant to note here: first, by default, Section 2(4) extends Part I of the ACA, except Sections 40(1), 41, and 43, to statutory arbitrations; and second, Section 2(4) itself provides for the overriding effect of the special law in case of inconsistency with its provisions. 41. 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. We are of the opinion that 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 o....
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....rbitration shall be conducted in England. While considering various submissions, this Court held that the issue of delay and laches did not arise in the facts of the case.53 It also rejected the contention of the appellant therein that the Limitation Act would have applied had the matter been referred to arbitration, by holding that this situation also does not arise as the State Commission decided the dispute itself.54 It then proceeded to observe that even if the matter were referred to arbitration, Section 43 of the ACA would not apply and consequently, the Limitation Act would not apply, due to Section 2(4) of the ACA.55 However, the Court finally noted that in any case, the arbitration clause is governed by English Law and hence the applicability of Section 43, which is under Part I, does not arise.56 46. It is therefore clear 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 (supra). This has also been noted by this Court in Lanco (supra)57, wherein the issue directly falling for the Court's considera....
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....Electricity Act and the Limitation Act to attract the provisions of Section 174 of the Electricity Act. In such a situation, on account of the provisions in Section 175 of the Electricity Act or even otherwise, the power of adjudication and determination or even the power of deciding whether a case requires reference to arbitration must be exercised in a fair manner and in accordance with law. In the absence of any provision in the Electricity Act creating a new right upon a claimant to claim even monies barred by law of limitation, or taking away a right of the other side to take a lawful defence of limitation, we are persuaded to hold that in the light of nature of judicial power conferred on the Commission, claims coming for adjudication before it cannot be entertained or allowed if it is found legally not recoverable in a regular suit or any other regular proceeding such as arbitration, on account of law of limitation. We have taken this view not only because it appears to be more just but also because unlike labour laws and the Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view. 31. We....
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....ision in TANGEDCO (supra), the Court in Lanco (supra) provided an alternative reasoning based on the principle of V.R. Kalliyanikutty (supra) to hold that the Limitation Act applies to proceedings under the Electricity Act. Hence, we are of the opinion that the decision in Lanco (supra) is not per incuriam, and there is no conflict between these judgments. We therefore reject the submission by the appellant on this ground as well. 48. In light of the above reasoning, this Court's decision in Silpi Industries (supra) cannot be said to be per incuriam, as has been contended before us. The Court in Silpi Industries (supra) considered the issue and conclusively decided that the provisions of the Limitation Act are applicable to arbitration under Section 18(3) of the MSMED Act. We have supplemented the reasoning provided in Silpi Industries (supra) by analysing with the interplay of Section 2(4) of the ACA and Section 18 and Section 24 of the MSMED Act. Considering the overriding effect of the provisions of the MSMED Act and the clear language of Section 18(3), we have arrived at the same conclusion as in Silpi Industries (supra) that Section 43 of the ACA applies to arbitrations under....
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....ement that can be arrived at through the conciliatory process. ii. 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. 52. We therefore partly allow the present appeals arising out of SLP (C) Nos. 6912-6920/2024 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. We have upheld the High Court's decision on the applicability of the Limitation Act to arbitration proceedings under the MSMED Act for the reasons provided hereinabove. 53. Pending applications, if any, stand disposed of. 54. No order as t....
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....l Excise v. Hongo India Pvt Ltd, (2009) 5 SCC 791, para 35. 16 Section 7 defines an arbitration agreement and sets out the mandatory requirements of an arbitration agreement. The relevant portion is: "7. Arbitration agreement.- (1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not." 17 Buyer is defined under Section 2(d) of the MSMED Act as: "2. Definitions.- In this Act, unless the context otherwise requires,- *** (d) "buyer" means whoever buys any goods or receives any services from a supplier for consideration;" 18 Supplier is defined under Section 2(n) of the MSMED Act as: "2. Definitions.- In this Act, unless the context otherwise requires,- *** (n) "supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,- (i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956); (ii) the Small Industries Development Corporation of a State ....
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....his 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." 22 (2008) 2 SCC 660. 23 (2008) 7 SCC 454. 24 (2010) 8 SCC 24. 25 Jarlour Singh (supra), para 8; Afcons Infrastructure Ltd. (supra), para 35. 26 Section 67(1) of the ACA; Jarlour Singh (supra), para 8. 27 Section 67(4) of the ACA. 28 Section 73(1) of the ACA; Jarlour Singh (supra), para 8; United India Insurance Co. Ltd. (supra), paras 22-23. 29 ibid. 30 ibid; Sections 67(2) and (3), Section 75 of the ACA. 31 Section 71 of the ACA. 32 Section 73(2) and Section 74 of the ACA; Jarlour Singh (supra), para 12; Afcons Infrastucture Ltd. (supra), para 38. 33 See Section 74 of the ACA read with Section 30 of the ACA. 34 M.P. Steel Corpn. v. CCE, (2015) 7 SCC 58, paras 11-32. 35 ibid, para 8. 36 ibid, para 8. 37 ibid, para 16. 38 ibid, paras 16 and 17. 39 ibid, para 17. 40 Ibid, para 14. It is relevant to note....