Supreme Court Clarifies Limitation Period Applicability Under MSMED Act: Conciliation Allowed for Time-Barred Claims

Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board & Ors. | 2025 LiveLaw (SC) 721

New Delhi, July 2025:
In a significant judgment affecting micro, small and medium enterprises (MSMEs), the Supreme Court has held that while time-barred claims cannot be enforced through arbitration under the MSMED Act, such claims can still be pursued through conciliation proceedings before the MSME Facilitation Council.

A Bench comprising Justice P.S. Narasimha and Justice Joymalya Bagchi ruled that the Limitation Act, 1963, is not applicable to conciliation proceedings under Section 18(2) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), but it does apply to arbitration proceedings under Section 18(3).

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Factual Background

The appellant, M/s Sonali Power Equipments Pvt. Ltd., a manufacturer of transformers, had supplied equipment to the Maharashtra State Electricity Board (MSEB). Despite completion of supply, an amount of ₹2.7 crore remained unpaid. After repeated delays and non-payment, the appellant approached the MSME Facilitation Council in 2018.

The Council rejected the claim, holding it to be barred by limitation. The Bombay High Court upheld this decision. Aggrieved, the appellant approached the Supreme Court, challenging the applicability of limitation to proceedings under the MSMED Act.

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Key Legal Findings of the Supreme Court

The Supreme Court partially allowed the appeal, making a clear distinction between conciliation and arbitration under the MSMED Act.

1. Conciliation Proceedings: Limitation Not Applicable

The Court held that conciliation under Section 18(2) of the MSMED Act is voluntary and non-adjudicatory, and therefore the Limitation Act does not apply to such proceedings.

“Conciliation being an out-of-court and non-adjudicatory process of dispute resolution, the Limitation Act cannot be extended to it,” the Court observed.

The judgment emphasized that a time-barred claim does not extinguish the underlying right, and such claims may be resolved through settlement agreements arrived at during the conciliation process.

2. Arbitration Proceedings: Limitation Applies

In contrast, the Court reaffirmed that arbitration under Section 18(3) of the MSMED Act is adjudicatory in nature, initiated upon filing of an application, and therefore subject to the provisions of the Limitation Act.

“It is a settled position that the Limitation Act applies to suits, appeals, and applications. Arbitration proceedings initiated under Section 18(3) are applications and hence attract the limitation bar,” the Court held.

Further, the applicability of the Arbitration and Conciliation Act, 1996 (ACA) is determined under the special scheme of the MSMED Act and not merely under Section 2(4) of the ACA.

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Clarified Legal Position

The Court laid down the following principles:

• Conciliation under Section 18(2) is not governed by the Limitation Act. MSME suppliers may refer time-barred claims to conciliation, and recovery is permissible through a mutually agreed settlement.
• Arbitration under Section 18(3) is governed by the Limitation Act. Once the claim is time-barred, arbitral remedies under the MSMED framework are no longer available.
• The possibility of extending limitation based on acknowledgments or disclosures under Section 22 of the MSMED Act is to be examined on a case-by-case basis.

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Significance of the Judgment

This ruling provides critical relief to MSMEs, which often face prolonged delays in receiving payments from large buyers. By allowing conciliation proceedings for time-barred claims, the Court has reaffirmed the pro-MSME spirit of the 2006 legislation and preserved the rights of small businesses to recover legitimate dues.

The judgment also adds clarity to the intersection between special legislation (MSMED Act) and general procedural law (Limitation Act), especially in the context of alternate dispute resolution mechanisms.

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Case Citation

• Case Title: M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai & Ors.
• Citation: 2025 Lawfer (SC) 011
• Bench: Justice P.S. Narasimha and Justice Joymalya Bagchi
• Date of Judgment: July 2025

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Legal Representation

For the Petitioner:
Dr. Abhishek Manu Singhvi, Sr. Adv.
Mr. Jayant Bhushan, Sr. Adv.
Mr. Prashant Pakhiddey, Adv.
Mr. Surjendu Sankar Das, AOR
Mr. Manav Gill, Adv.
Ms. Annie Mittal, Adv.

For the Respondents:
Mr. Shikhil Suri, Sr. Adv.
Mr. Udit Gupta, Adv.
Mr. Anup Jain, Adv.
Ms. Prachi Gupta, Adv.
Ms. Nishtha Goel, Adv.
Mr. Amarendra Kumar, Adv.
M/s Udit Kishan & Associates, AOR