In a significant judgment aimed at clarifying a key procedural aspect of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act), the Supreme Court has drawn a crucial distinction between conciliation and arbitration processes initiated under the Act. The Court ruled that the Limitation Act, 1963 does not apply to conciliation proceedings carried out under Section 18 of the MSMED Act. However, once the dispute progresses to arbitration, either through the MSME Facilitation Council or an appointed arbitrator, the provisions of the Limitation Act do come into full effect.
The case arose from a commercial dispute involving Sonali Power Equipments Private Limited, an MSME supplier that had provided goods and services to a government body but had not received payment within the stipulated period. Seeking redress, the company approached the Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act to initiate a conciliation process. However, the Council rejected the application on the ground that the claim was barred by limitation, i.e., it had been filed after the three-year period prescribed under the Limitation Act. The Bombay High Court upheld the Council’s decision, agreeing that the claim was time-barred and therefore not maintainable, even at the conciliation stage.
Upon appeal, the Supreme Court examined whether such a bar under the Limitation Act could legitimately be applied at the conciliation stage of proceedings under the MSMED Act. The Court undertook a careful review of the statutory framework, the nature of conciliation and arbitration, and the overarching purpose of the MSMED Act, which is to ensure timely payments and protection for micro and small enterprises that often suffer due to delayed settlements by larger buyers.
In its detailed reasoning, the Supreme Court emphasized the fundamentally different nature of conciliation when compared to arbitration. Conciliation, as per the provisions of the Arbitration and Conciliation Act, is a non-adjudicatory, voluntary, and non-binding process that encourages disputing parties to reach a mutually acceptable settlement without resorting to formal legal proceedings. Given this nature, the Court held that conciliation is not a judicial proceeding, nor does it bear the characteristics of an adjudicatory process. Consequently, the technical limitations imposed by the Limitation Act do not apply to this stage.
The Court further explained that when a supplier initiates conciliation through the Facilitation Council under the MSMED Act, the process is aimed at encouraging dialogue and reconciliation. Since there is no imposition of a legal remedy or binding decision at this stage, the strict timelines and procedural formalities associated with litigation or arbitration do not constrain the parties. The aim of conciliation is to provide an accessible, informal, and amicable environment in which parties can attempt to settle disputes—even if those disputes stem from claims that may be technically time-barred in a formal legal sense.
However, the Court made a clear and critical distinction when it came to arbitration. The judgment stated that once conciliation fails and the matter transitions into arbitration—either before the Facilitation Council acting as an arbitrator or through an arbitrator appointed by it—then the arbitration proceedings are governed by the Arbitration and Conciliation Act, 1996. Section 43 of this Act explicitly applies the provisions of the Limitation Act to arbitration proceedings. Therefore, any claim brought before an arbitrator must be within the limitation period prescribed by law, generally three years from the date the cause of action arose, unless otherwise extended by principles such as acknowledgment of debt or part payment.
This dual approach by the Supreme Court maintains a balance between the pro-MSME objective of the MSMED Act and the need to preserve the certainty and discipline provided by limitation rules in formal legal proceedings. By excluding conciliation from the scope of limitation laws, the Court has allowed micro and small enterprises an opportunity to raise even stale claims in a conciliatory forum without fear of technical dismissal. At the same time, by insisting that arbitration remains subject to limitation, it preserves the integrity and procedural fairness of adjudicatory mechanisms.
The ruling also touched upon the principle that limitation does not extinguish the debt itself but only the remedy to enforce it through a court or arbitral forum. This means that even if a claim is time-barred, it does not render the underlying obligation invalid. A party may still acknowledge the debt or settle it voluntarily, which is precisely what conciliation is intended to facilitate. The Supreme Court noted that this principle underlines why limitation cannot obstruct parties from attempting to reach a negotiated settlement through conciliation.
Another important aspect considered by the Court was whether the period spent during conciliation can be excluded when calculating limitation for arbitration proceedings that follow. While the Court did not lay down a hard-and-fast rule on this point, it emphasized that such matters must be evaluated on a case-by-case basis. If a genuine effort at conciliation was ongoing, and the parties were actively engaged, it may be reasonable to exclude that period from the calculation of the limitation period for subsequent arbitration. However, if conciliation was only initiated as a delay tactic, courts and arbitrators must be cautious not to let the process become a tool for evasion of statutory timelines.
The judgment has significant implications for both MSME suppliers and their buyers. For MSMEs, it offers a wider window to initiate conciliation proceedings, allowing even delayed claims to be considered in a non-adjudicatory format. This provides a chance for voluntary resolution without getting entangled in technical objections regarding limitation. For buyers, it signals that once the matter proceeds to arbitration, they retain the right to raise limitation as a defense, and the arbitration panel must consider such objections in accordance with law.
In essence, the Supreme Court’s ruling serves to promote the legislative intent behind the MSMED Act, which is to provide speedy and effective redressal mechanisms for small businesses facing payment delays. By exempting conciliation from limitation constraints, the Court empowers MSMEs to initiate dialogue with defaulting buyers even after considerable delays, increasing the possibility of out-of-court settlements. At the same time, it reinforces the legal discipline necessary in arbitration proceedings, where limitation serves to prevent indefinite legal exposure and ensure fairness.
This decision is likely to influence the manner in which Facilitation Councils handle cases across the country. Councils must now be cautious not to reject conciliation applications solely on the basis of limitation. They must entertain such requests and allow parties to explore settlement. Only when the process shifts to arbitration will limitation come into play. Legal practitioners and businesses involved in MSME disputes will need to adopt a more nuanced strategy, recognizing the distinct phases of dispute resolution and the legal standards that apply at each stage.
In conclusion, the Supreme Court has provided much-needed clarity on a complex procedural issue that has long caused confusion among MSMEs and Facilitation Councils. By drawing a clear line between conciliation and arbitration under the MSMED Act, the Court has reaffirmed the dual objectives of access to justice and procedural fairness. It has opened the door wider for informal resolution of disputes, while ensuring that formal adjudication continues to be governed by the established principles of limitation law. This judgment strengthens the MSMED framework and affirms the judiciary’s role in interpreting welfare legislation in a manner that supports its underlying purpose.
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