Time-Barred Claims Under MSMED Act: Supreme Court Clarifies Conciliation and Arbitration Rights in Sonali Power Equipments v. MSEB (2025)

Introduction

In a landmark decision that brings clarity to the interplay between the Limitation Act, 1963, and the dispute resolution framework under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), the Supreme Court in M/S Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board & Ors.[1], has definitively ruled on whether time-barred claims can be referred to conciliation or arbitration under Section 18[2] of the MSMED Act.

This judgment is pivotal for suppliers registered under the MSMED Act, Facilitation Councils, and commercial entities engaging with small and medium enterprises.

Factual Background

The case arose out of a long-standing commercial relationship between the Appellant, M/S Sonali Power Equipments Pvt. Ltd., a registered micro and small enterprise based in Nagpur, and the Respondents, including the Chairman, Maharashtra State Electricity Board (“MSEB”). Between the years 1993 and 2004, the Appellant supplied a series of electrical transformers and allied equipment to the Respondents pursuant to various purchase orders issued from time to time.

Despite fulfilling its contractual obligations, the Appellant was subjected to prolonged delays in payment by the Respondents. In light of the persistent non-payment, the Appellant, during 2005–2006, invoked its statutory rights and filed references before the Industry Facilitation Council constituted under the erstwhile Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (the “1993 Act”).

Subsequently, with the coming into force of the MSMED Act, which repealed the 1993 Act, the proceedings initiated by the Appellant were seamlessly continued by the Micro and Small Enterprises Facilitation Council in accordance with Section 32[3] of the MSMED Act.

After due proceedings, the Facilitation Council, by an award dated 28^th January 2010, upheld the Appellant’s claim and awarded it interest on the delayed payments under Section 16[4] of the MSMED Act, which mandates a penal rate of interest for defaulting buyers.

Aggrieved by the award, the Respondents invoked Section 34[5] of the Arbitration and Conciliation Act, 1996 (“A&C Act”) to challenge the award before the jurisdictional Commercial Court. In compliance with Section 19[6] of the MSMED Act, the Respondents deposited 75% of the award amount as a precondition to filing the challenge.

By an order dated 26^th October 2017, the Commercial Court allowed the challenge and set aside the award. The primary ground for allowing the challenge was that the Appellant’s claims were barred by limitation, and therefore, the Facilitation Council had no jurisdiction to entertain the claims in the first instance.

The Appellant preferred an appeal under Section 37[7] of the A&C Act before the Bombay High Court. During the hearing, the Division Bench of the High Court noted a conflict in judicial opinion concerning the applicability of the Limitation Act, 1963, to proceedings under Section 18 of the MSMED Act, particularly with reference to the earlier decision in Delton Electricals v. MSEDCL[8]. Accordingly, the matter was referred to a larger bench.

The Full Bench of the Bombay High Court, by judgment dated 20^th October 2023, ruled against the Appellant, holding that:

• The Limitation Act applies to arbitration proceedings under Section 18(3) of the MSMED Act;
• Although the Limitation Act may not formally apply to conciliation, even time-barred claims cannot be referred to the Facilitation Council for conciliation as they are not “amounts due” under the MSMED Act.

Challenging this interpretation, the Appellant approached the Supreme Court of India[9], giving rise to the present appeals.

This blog is a part of our Global Arbitration Services

Issues Raised in the Case

The core issue before the Apex Court was whether:

1. The Limitation Act, 1963, applies to conciliation and/or arbitration proceedings under Section 18 of the MSMED Act; and
2. Even if limitation laws are not strictly applicable, can time-barred debts be recovered through conciliation or arbitration under the MSMED framework?

Statutory Framework: Interplay Between the Limitation Act, A&C Act, the MSMED Act, and the Indian Contract Act

Before analysing the legal issues, the Court delved into the statutory scheme governing delayed payments and dispute resolution, especially under the MSMED Act and its interaction with the Limitation Act, 1963, and the A&C Act.

Limitation Act, 1963

• Section 3 mandates dismissal of suits, appeals, or applications filed beyond the prescribed limitation, even if the limitation is not pleaded.
• Section 29(2) makes the Limitation Act applicable to proceedings under special or local laws (like the MSMED Act), unless expressly or impliedly excluded.
• Courts have held that exclusion under Section 29(2) can be express or implied, depending on the legislative intent.

A&C Act, 1996

• Section 2(4) governs statutory arbitrations and provides that Part I of the A&C Act applies unless inconsistent with the parent enactment; however, Sections 40(1), 41, and 43 (which includes application of the Limitation Act) do not apply unless specifically incorporated.
• Section 7 defines arbitration agreements.
• Section 43 provides that the Limitation Act applies to arbitral proceedings as it applies to court proceedings.
• Part III (Sections 65 – 81) governs conciliation, a non-adjudicatory, flexible process aimed at amicable settlement.
• Section 73 provides for a settlement agreement that is final and binding.
• Section 74 gives such agreement the same status as an arbitral award.
• Section 76 specifies when conciliation proceedings are deemed terminated.

MSMED Act, 2006

• Section 15 obligates buyers to pay within the agreed date (not exceeding 45 days) or the appointed day.
• Section 16 imposes compound interest at three times the RBI bank rate on delayed payments, overriding any contract to the contrary.
• Section 17 provides for recovery of the amount due with interest.
• Section 18 empowers either party to a payment dispute to refer the matter to the Facilitation Council, which must first attempt conciliation and, if unsuccessful, proceed to arbitration, both governed by the A&C Act. Proceedings must be concluded within 90 days.
• Section 19 requires a 75% pre-deposit by the buyer for challenging an award under Section 34 of the A&C Act.
• Sections 22 and 23 deal with disclosure and tax treatment of delayed payment interest.
• Section 24 gives overriding effect to Sections 15 – 23 over any conflicting law.

Indian Contract Act, 1872

• Section 25(3) allows parties to contractually acknowledge and pay time-barred debts.
• Section 60 permits a debtor to apply a payment towards any lawful debt owed to the creditor, including debts that are barred by limitation, provided such debt is otherwise legally recoverable in nature.

Court’s Observations

Conciliation proceedings

The Court held that the Limitation Act does not apply to conciliation proceedings under Section 18(2) of the MSMED Act and that conciliation is a non-adjudicatory, non-coercive process. The statutory scheme under Sections 65 to 81 of the A&C Act (which governs conciliation) does not incorporate the Limitation Act. Importantly, time-barred debts can be validly referred to conciliation because:

1. The limitation law extinguishes the remedy, not the underlying right;
2. Parties can settle time-barred claims under Section 25(3) of the Contract Act;
3. A valid conciliation settlement can be recorded and enforced as an arbitral award under Section 74 of the A&C Act;
4. The process remains consensual, without prejudice to either party’s rights in arbitration.

The Court distinguished earlier judgments like State of Kerala v. V.R. Kalliyanikutty[10], holding that, unlike coercive statutory recoveries, conciliation is voluntary and non-binding unless agreed upon.

Arbitration Proceedings

The Court upheld the ruling in Silpi Industries v. Kerala SRTC[11] that:

1. The Limitation Act does apply to arbitration under Section 18(3) of the MSMED Act.
2. This is because Section 18(3) expressly states that arbitration shall be conducted as if there were an arbitration agreement under Section 7(1) of the A&C Act, thus attracting Section 43.
3. Time-barred claims cannot be referred to arbitration, as allowing such claims would undermine the statutory goal of speedy recovery and certainty in commercial transactions.

The Court rejected the argument that arbitration under MSMED is a statutory arbitration excluded from Section 43 by virtue of Section 2(4) of the A&C Act, noting that Section 18(3) expressly adopts the A&C Act’s framework by legal fiction.

Role of Balance Sheet Disclosures (Section 22 MSMED Act)

The appellants had argued that entries made by buyers in their financial statements (mandated under Section 22) constituted an acknowledgment of debt, thereby extending the limitation.

However, the Court held:

1. These entries are compliance mechanisms, not voluntary acknowledgments under Section 18 of the Limitation Act.
2. Mere disclosure does not constitute a valid extension of limitation unless there is a clear, voluntary acknowledgment of liability.

Practical Insights and Forward-Looking Implications

1. Clarity on time-barred claims under MSMED framework: The ruling brings welcome clarity to the long-standing debate on whether time-barred claims can be entertained under Section 18 of the MSMED Act. It draws a critical distinction between conciliation (where limitation does not apply) and arbitration (where it does). Going forward, parties can no longer initiate arbitration under the MSMED Act for time-barred claims, even if the underlying invoice remains unpaid.
2. Reinforcement of legal certainty for buyers and suppliers: The decision reinforces the importance of legal certainty and limitation discipline in commercial transactions. Buyers gain protection against stale claims being revived through statutory arbitration, while suppliers are incentivised to initiate proceedings promptly and to maintain proper documentation evidencing acknowledgment of debt where applicable.
3. Strategic use of conciliation as a pre-limitation option: The Court’s affirmation that conciliation can still be pursued for time-barred claims, and that such settlements are legally enforceable, creates a valuable strategic tool for suppliers. They may still leverage conciliation to negotiate settlements, especially where a cooperative buyer exists or where reputational concerns motivate resolution despite lapse of time.
4. Importance of express acknowledgment of debt: The Court rejected the argument that mandatory disclosures under Section 22 of the MSMED Act constitute acknowledgment under Section 18 of the Limitation Act. Hence, suppliers must ensure that any acknowledgment of liability by the buyer is clear, voluntary, and preferably in writing, if they wish to extend the limitation.
5. Procedural discipline for facilitation councils: Facilitation Councils will now be required to scrutinise limitation issues at the arbitration stage, ensuring that only legally enforceable claims proceed to adjudication. This may reduce the volume of contested awards being set aside under Section 34, thereby improving enforcement efficiency.
6. Impact on pending and future litigation: The decision will directly affect pending Section 34 and Section 37 proceedings where limitation was not raised but could be. Buyers may now raise retrospective limitation challenges to arbitral awards issued under the MSMED Act. Conversely, suppliers may explore settlement options via conciliation where formal enforcement is barred.
7. Contractual and compliance practices for MSMEs: MSMEs should now consider reviewing their standard operating procedures to ensure:

• Prompt invoicing and follow-up;
• Timely initiation of conciliation under Section 18(2);
• Obtaining written acknowledgments where payment is delayed;
• Careful documentation of payment communications for potential evidentiary use.

8. Judicial consistency and institutional confidence: By settling a key interpretational issue and overruling conflicting High Court precedents, this judgment contributes to jurisprudential coherence and predictability, which are essential for strengthening trust in statutory dispute resolution frameworks for MSMEs.

Conclusion

The Supreme Court’s judgment in Sonali Power Equipments strikes a nuanced balance between the statutory protections available to MSMEs and the commercial necessity of respecting limitation periods. The ruling confirms that (a) time-barred claims can be referred to conciliation, and if settled, can be validly enforced; (b) time-barred claims cannot be referred to arbitration under the MSMED Act; and
(c) entries in the buyer’s financial records do not automatically extend limitation periods unless they amount to an acknowledgment under law. This judgment will serve as binding precedent for future disputes under the MSMED Act and reinforces the importance of timely enforcement of rights by suppliers, while still preserving the door to amicable settlement through conciliation.

Foot Notes………………………………………………………………………………………………………………..

[1] 2025 INSC 864

[2] “Section 18- Reference to Micro and small Enterprises Facilitation Council”. Section 18 of the MSMED Act provides a statutory mechanism for the resolution of payment disputes between a supplier and a buyer. It enables either party to make a reference to the Micro and Small Enterprises Facilitation Council for the recovery of amounts due under Section 17. The Council must first initiate conciliation either by itself or through an ADR institution, and if the conciliation fails, it shall proceed to arbitration or refer the matter to an arbitral institution. These proceedings are governed by the Arbitration and Conciliation Act, 1996, and are to be concluded within 90 days. The Council or the institution it designates has jurisdiction over the dispute regardless of the buyer’s location in India.

[3] “Section 32- Repeal of Act 32 of 1993”- Section 32 repeals the earlier Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, but ensures continuity by stipulating that any action taken or proceeding initiated under the repealed Act shall be deemed to have been taken under the corresponding provisions of the MSMED Act, thereby preserving the legal validity of such actions.

[4] “Section 16- Date from which and rate at which interest is payable”- Section 16 imposes a stringent financial consequence on the buyer for delayed payments. If a buyer fails to make payment to the supplier within the period stipulated under Section 15, the buyer is statutorily liable to pay compound interest with monthly rests, calculated at three times the bank rate notified by the Reserve Bank of India. This obligation overrides any contrary terms in the contract or in any other prevailing law.

[5] “Section 34- Application for setting aside arbitral awards”- Section 34 provides the statutory mechanism for challenging an arbitral award before a court. An award may be set aside only by an application filed within three months (extendable by thirty days for sufficient cause). Grounds for setting aside include: incapacity of a party, invalidity of the arbitration agreement, lack of proper notice or fair hearing, award exceeding the scope of reference, procedural irregularities, or conflict with the public policy of India, which includes fraud, corruption, or contravention of fundamental legal principles. In domestic arbitrations, an award may also be set aside if it suffers from patent illegality apparent on its face. Courts must reject challenges based on mere errors of law or re-appreciation of evidence. The application must be preceded by prior notice to the opposite party and supported by an affidavit of compliance, and is required to be disposed of within one year from the date of notice.

[6] “Section 19- Application for setting aside decree, award or order”- Section 19 mandates that any application to set aside an award, decree, or order passed by the Facilitation Council or a designated ADR institution shall not be entertained by any court unless the appellant (other than the supplier) deposits 75% of the awarded amount before the court. The court is empowered to direct partial release of the deposited amount to the supplier, pending disposal of the challenge, on such terms as it deems just and appropriate.

[7] “Section 37- Appealable orders”- Section 37 governs appeals in arbitration matters, permitting a party to file an appeal only against specific orders. An appeal lies to the court having jurisdiction to hear appeals from original decrees, in cases where the court has: (a) refused to refer parties to arbitration under Section 8, (b) granted or refused interim measures under Section 9, or (c) set aside or refused to set aside an arbitral award under Section 34. Appeals are also maintainable against orders of the arbitral tribunal accepting a jurisdictional plea under Section 16 or granting/refusing interim measures under Section 17. However, no second appeal is permitted under this section, except for an appeal to the Supreme Court where applicable.

[8] Commercial Appeal No. 38/2017, judgment dated 31 August 2017. The Court held that, under Section 2(4) of the A&C Act, Section 43 (applying the Limitation Act) does not apply to statutory arbitrations under the MSMED Act; hence, limitation was held to be inapplicable.

[9] The two-judge bench of the Supreme Court comprised Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi

[10] (1999) 3 SCC 657. In V.R. Kalliyanikutty, a three-judge bench of the Supreme Court held that time-barred debts cannot be recovered under the Kerala Revenue Recovery Act, 1968, as the expression “amount due” refers only to amounts legally recoverable. The Court reasoned that the Act does not create a new substantive right of recovery but merely provides a coercive mechanism for enforcing existing claims, which must comply with the Limitation Act.

[11] (2021) 18 SCC 790. In Silpi Industries, the Supreme Court addressed whether the Limitation Act applies to arbitration proceedings initiated under Section 18(3) of the MSMED Act. The case involved suppliers who had initially approached the Facilitation Council under the 1993 Act for time-barred claims, which culminated in arbitral awards under the MSMED Act. The buyer challenged the awards under Sections 34 and 37 of the A&C Act. Affirming the High Court’s view, the Supreme Court held that since Section 18(3) deems there to be an arbitration agreement, the provisions of the A&C Act, including Section 43 (which applies the Limitation Act), would squarely apply to such proceedings.