TaxTMI 
TaxTMI 
2025 (7) TMI 1204
X X X X Extracts X X X X
X X X X Extracts X X X X
......4 IV. Impugned order: .......................................................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, 1963^1 are applicable to conciliation and arbitration proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006^2. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e division bench referred the issue of applicability of Limitation Act to proceedings under the MSMED Act to a larger bench. It took note of a coordinate bench's decision in M/s. Delton Electricals v. MSEDCL^7 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. Kalliyanikutty^8 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 inte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) Whether the provisions of Indian Limitation Act, 1963 are applicable to arbitration proceedings under Section 18(3) of MSMED Act, 2006?" 5.1 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 proceeded as follows. Relying on this Court's decision in Silpi Industries^9 and Mahakali Foods^10 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er Section 18 for recovery of money with a higher rate of interest. Issue B: An incongruous situation as contemplated in Delton (supra) arises. If the limitation provisions are not applied to 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Section 2(4), Limitation Act cannot be extended to arbitrations under the MSMED Act. Further, there is no provision under the MSMED Act providing for the applicability of the Limitation Act to proceedings under it. 6.3 Section 22 of the MSMED Act mandates 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-barre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der dated 24.08.2018 (paragraph 46). There are several questions of law arising therein, such as whether the jurisdiction of civil courts is ousted by the MSMED Act, commencement of the limitation period, extension of the limitation period, and applicability of decisions rendered 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? F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty of the Limitation Act to arbitral proceedings. It reads: "43. Limitations.-(1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court." 14. Part III of the ACA deals with conciliation of disputes. Section 67 therein provides for the role of the conciliator, and is extracted 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e behest of the conciliator or one or both parties, when there is no settlement, by way of a written declaration. Section 76 of the ACA reads: "76. Termination of conciliation proceedings.- The conciliation proceedings shall be terminated- (a) by the signing of the settlement agreement by the parties, on the date of the agreement; or (b) by a written declaration of the conciliator, after consultation 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 buyer^17 in respect of timelines for payment to the supplier^18 as follows- on or bef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 18 is extracted below for ready reference: "18. Reference to Micro and Small Enterprises Facilitation Council.- (1) Notwithstanding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force." VIII. Whether time-barred claims can be referred to conciliation under Section 18(2) of the MSMED Act: 24. In light of the above statutory provisions, we will decide the first issue of 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. 25. Conciliation 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 Sinha^23, 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 V....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed order as well, in that it has held that the Limitation Act does not directly apply to conciliation proceedings. However, the High Court adopted a different approach and interpreted the term "amount due" referred in Sections 17 and 18 of the MSMED Act to hold that time-barred claims are not included, and hence cannot be referred to conciliation under Section 18(2). In doing so, the High Court primarily relied on this Court's decision in V.R. Kalliyanikutty (supra), and its reliance in Lanco (supra). We will now examine the legality and correctness of the High Court'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 ti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....liation 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. As we have already explained, merely because conciliation is mandatory does not mean that the parties are required to settle the dispute. They may choose to terminate conciliation 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 righ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for this reason, the matter must be referred to arbitration as per Section 18(3), which we will deal with presently. IX. Whether time-barred claims can be referred to arbitration under Section 18(3) of the MSMED Act: 34. The next issue falling for our consideration is whether the Limitation Act applies to arbitration by the Facilitation Council under Section 18(3), and whether time-barred claims can be referred to arbitration. At this very stage, it is necessary to take note of this Court's decision in Silpi Industries (supra), which the High Court relied on to hold that time-barred claims 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 are made applicable as if the arbitration was in pursuance of arbitration agreement between the parties, under sub-section (1) of Section 7 of the 1996 Act. 26. Applicability of the Limitation Act, 1963 to the arbitrations is covered by Section 43 of the 1996 Act. The High Court, while referring to abovesaid provisions and the judgment of this Court in A.P. Power Coordination Committee v. Lanco Kondapalli Power 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on stands terminated without a settlement, the matter must be referred to arbitration and the provisions of the ACA shall apply as if the arbitration is in pursuance of an arbitration agreement under Section 7(1) of the ACA. It is clear that there is a statutory deeming fiction that the arbitration under the statute is to be considered as being pursuant to an arbitration agreement.^51 It is also relevant to note that Section 24 of the MSMED Act provides for the overriding effect of Sections 15 to 23 notwithstanding anything inconsistent in any other law for the time being in force. 40. Section 2(4) of the ACA also employs a similar 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, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing its reliance in Silpi Industries (supra) as incorrect. It is relevant to note that Lanco (supra) and TANGEDCO (supra) arise in the context of the Electricity Act, 2003 and the applicability of the Limitation Act to arbitrations conducted thereunder. 45. In TANGEDCO (supra), a dispute regarding payments under a Power Purchase Agreement (PPA) was raised before the State Electricity Regulatory Commission, which allowed the same and held that the Limitation Act does not apply to claims under the Electricity Act. It is also relevant to note that the PPA contained an arbitration clause, which is governed by English law and provided that the arbitration 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 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the duty cast upon the authority to determine what is recoverable or payable implies a duty to determine such claims in accordance with law. In our considered view a statutory authority like the Commission is also required to determine or decide a claim or dispute either by itself or by referring it to arbitration only in accordance with law and thus Sections 174 and 175 of the Electricity Act assume relevance. Since no separate limitation has been prescribed for exercise of power under Section 86(1)(f) nor this adjudicatory power of the Commission has been enlarged to entertain even the time-barred claims, there is no conflict between the provisions of the 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 limita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....city Act, 2003 and not in respect of its other powers or functions which may be administrative or regulatory." 47. In view of the above reading of TANGEDCO (supra) and Lanco (supra), the following can be concluded: first, the issue of applicability of the Limitation Act to statutory arbitrations is not an issue determining the rights and liabilities of the parties in TANGEDCO (supra); second, the issue of applicability of the Limitation Act to statutory arbitrations does not arise in Lanco (supra), and the Court was in fact dealing with whether time- barred claims can be entertained in proceedings before the State Commission; and third, after taking note of the decision 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)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nowledgement of debt as per the requirements of Section 18 of the Limitation Act.^64 It is sufficient to restate this position of law for our purpose. X. Conclusion : 51. On considering the statutory provisions of the MSMED Act, the ACA, and the Limitation Act, the precedents of this Court, and on the basis of the above reasoning, we have answered the issues arising in the present appeals as follows: i. 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. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the provisions of section 3 shall apply as if such period were the period prescribed by the Schedule and for the purpose of determining any period of limitation prescribed for any suit, appeal or application by any special or local law, the provisions contained in sections 4 to 24 (inclusive) shall apply only in so far as, and to the extent to which, they are not expressly excluded by such special or local law." Although the expression used in the provision is "expressly excluded", this Court has consistently interpreted the same to include implied exclusions. See Hukumdev Narain Yadav v. Lalit Narain Mishra, (1974) 2 SCC 133, para 17; Union of India v. Popular Construction, (2001) 8 SCC 470, paras 8-11; Commissioner of Customs and Central 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 relat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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." 22 (2008) 2 ....