In a significant judgment impacting the resolution of commercial disputes involving micro, small and medium enterprises (MSMEs), the Supreme Court on Thursday ruled that the Limitation Act, 1963, is applicable to arbitration proceedings under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, but not to conciliation proceedings under the same statute.
A bench comprising Justices P S Narasimha and Joymalya Bagchi delivered the verdict while partly allowing a batch of appeals, including one filed by M/s Sonali Power Equipments Pvt Ltd, challenging a 2023 decision of the Bombay High Court.
“We have upheld the decision of the High Court to the extent of the Limitation Act being applicable to arbitration proceedings under the MSMED Act,” the bench observed.
However, the Court clarified that conciliation under Section 18(2) of the MSMED Act stands on a different footing. Writing the judgment, Justice Narasimha noted:
“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 the limitation period does not extinguish the right to recover the amount, including through a settlement agreement.”
The ruling resolves a long-standing ambiguity around the interplay between the Limitation Act, which imposes strict deadlines for initiating legal actions, and the dispute resolution mechanisms under the MSMED Act, which encourages speedy and cost-effective redressal through conciliation and arbitration.
The bench also underscored that there is no legal prohibition in either the Limitation Act, the MSMED Act, or judicial precedent that bars conciliation over time-barred debts.
