Settlement Of Time-Barred Debts Allowed, But No Recovery Through Arbitration: Supreme Court Resolves MSMED Act Limitation Dilemma

“Conciliation Is A Voluntary, Non-Adjudicatory Process Unaffected By Limitation—Arbitration Must Respect The Boundaries Of Limitation Law,” In a landmark judgment Supreme Court of India delivered clarity on a long-standing controversy concerning the application of the Limitation Act, 1963 to proceedings under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). In this case, the Court conclusively held that, “while conciliation under Section 18(2) of the MSMED Act remains outside the purview of limitation, arbitration proceedings under Section 18(3) are fully governed by the Limitation Act.”

With this decision, the Court struck a delicate balance—affirming the right of suppliers to pursue conciliation even in time-barred claims, while strictly barring the recovery of such claims through arbitration proceedings.

The dispute traces back to the supply of transformers by small-scale industries between 1993 to 2004 to the Maharashtra State Electricity Board (MSEB). Owing to delayed payments, the suppliers invoked remedies under the erstwhile 1993 Act, and post its repeal, their claims were transferred to the Facilitation Council under the MSMED Act, 2006.

The Facilitation Council awarded the suppliers delayed payment dues along with interest, but the Commercial Court annulled the award on the ground of limitation. This led to an appeal to the High Court, which ruled against the suppliers, holding that the Limitation Act applied to both conciliation and arbitration proceedings under the MSMED Act. Dissatisfied, the suppliers appealed to the Supreme Court.

The crux of the dispute before the Supreme Court was twofold: firstly, whether time-barred claims could be pursued in conciliation under Section 18(2) of the MSMED Act; and secondly, whether such claims could be enforced through arbitration under Section 18(3).

While addressing the first question, the Court noted, “Conciliation is non-adjudicatory in nature; it is neither coercive nor adjudicatory but facilitates amicable settlements.” The Court stressed that conciliation is premised on party autonomy and does not extinguish a creditor’s right to settle time-barred debts.

On the second issue, the Court took a stricter view, unequivocally declaring, “Arbitration proceedings under Section 18(3) are clothed with all attributes of adjudication and necessarily attract the bar of limitation under Section 43 of the Arbitration and Conciliation Act, 1996.”

Supreme Court’s Reasoning on Conciliation: Settlement Even After Limitation Period Valid

The Supreme Court firmly ruled that, “The law of limitation extinguishes the remedy but not the underlying right,” thereby permitting conciliation even for claims barred in courts. The Court rejected the High Court’s reliance on the judgment in State of Kerala v. V.R. Kalliyanikutty, observing that coercive judicial recovery mechanisms are distinct from voluntary conciliation.

Highlighting the voluntary essence of conciliation, the Court explained, “Section 18(2) of the MSMED Act read with Sections 65 to 81 of the Arbitration Act, 1996 does not impose limitation periods on conciliation. Conciliation is a dialogue-driven mechanism where parties are free to negotiate a settlement notwithstanding the lapse of limitation.”

Citing the Contract Act, the Court emphasized, “Section 25(3) of the Indian Contract Act permits a promise to pay time-barred debt. A settlement reached through conciliation is no different in law—it merely acknowledges an existing right that survives limitation, though unenforceable in a court.”

The Court criticized the High Court’s reasoning as being “blinded by the objective of speedy recovery, losing sight of the fact that conciliation is a non-adjudicatory, voluntary process, where limitation defences are irrelevant.”

Supreme Court’s Ruling on Arbitration: Limitation Law Applies With Full Force

On arbitration, the Court categorically upheld the High Court’s stance, reaffirming the law laid down in Silpi Industries v. Kerala State Road Transport Corporation. The Court stated, “Section 18(3) deems statutory arbitration under the MSMED Act to be as if arising from an arbitration agreement under Section 7 of the Arbitration Act—thus importing the entirety of the Act, including Section 43, which makes the Limitation Act applicable.”

Rejecting the suppliers' argument on Section 2(4) of the Arbitration Act, the Court ruled, “Section 18(3) of the MSMED Act, being a special provision, overrides Section 2(4) of the Arbitration Act. The non-obstante clauses in Sections 18(1), 18(3), and 24 of the MSMED Act decisively affirm this.”

Referring to its own precedent, the Court remarked, “Silpi Industries remains good law, its foundation resting on the special legislative intent behind Section 18(3)—which consciously embraces the full framework of the Arbitration Act, including the limitation regime.”

On Balance Sheet Acknowledgements: No Automatic Extension of Limitation

The appellants contended that under Section 22 of the MSMED Act, disclosures in buyers’ balance sheets acknowledging outstanding dues extend the limitation period. The Court, however, clarified, “An entry in financial statements is not a per se acknowledgment under Section 18 of the Limitation Act.”

Quoting Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, the Court reiterated, “Whether such a disclosure amounts to acknowledgment depends on the accompanying explanatory notes and factual context; it is not a blanket extension of limitation.”

A Split Verdict—Fairness for Suppliers, Finality for Debtors

In its final verdict, the Supreme Court succinctly concluded, “Time-barred claims can be amicably settled through conciliation but cannot be recovered through arbitration.”

The Court partly allowed the appeals, setting aside the High Court’s ruling that barred conciliation for time-barred claims but upheld the application of limitation to arbitration proceedings.

In a compelling observation, the Court summed up its ruling stating, “Suppliers’ right to recover subsists post-limitation, but its enforceability depends on the forum chosen—conciliation remains open, arbitration remains closed.”

Date of Decision: 17th July 2025