The Supreme Court defined the procedural boundaries for recovering delayed payments while examining the applicability of limitation law to statutory mechanisms under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The ruling was delivered on July 17, 2025, in M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai & Ors. (Civil Appeal Nos. 9524-9532 of 2025, arising out of SLP (C) Nos. 6912-6920 of 2024).
The Statutory Conflict and Context
The dispute arose after suppliers delivered equipment between 1993 and 2004, later initiating recovery references before the Facilitation Council under Section 18 of the MSMED Act. Although the Council passed awards granting outstanding dues and interest, the awards were challenged on the ground that the underlying claims were barred by limitation. The High Court of Bombay (Full Bench) held that time-barred claims could neither be entertained in statutory conciliation nor sustained in arbitration.
The matter before the Supreme Court turned on the interplay between the Limitation Act, 1963, the Arbitration and Conciliation Act, 1996 (ACA), and Section 18 of the MSMED Act. The primary questions were whether time-barred debts can be referred to conciliation, and whether the law of limitation bars arbitration references under Section 18(3).
Conciliation: No Bar on Time-Barred Claims
Overruling the High Court in part, the Court held that the Limitation Act does not apply to conciliation proceedings conducted under Section 18(2) of the MSMED Act.
The Court reasoned that conciliation is purely an out-of-court, non-adjudicatory, and non-coercive process. Unlike a judicial forum, a conciliator possesses no authority to adjudicate rights or pass binding orders against an unwilling party. The process relies entirely on voluntary agreement and mutual compromise.
Emphasizing the foundational principle of limitation jurisprudence, the Court observed that the expiry of a limitation period merely bars the judicial remedy; it does not extinguish the substantive right to the debt. The underlying obligation subsists. Section 25(3) of the Indian Contract Act, 1872 explicitly recognizes the validity of a written agreement to pay a time-barred debt. Therefore, a settlement reached through conciliation is equivalent to a lawful contract. Barring parties from attempting conciliation simply because a claim is old would defeat the beneficial purpose of the legislation.
Arbitration: Strict Applicability of Limitation
In contrast, the Court affirmed that the Limitation Act applies strictly to arbitration proceedings conducted under Section 18(3) of the MSMED Act.
The appellants argued that Section 2(4) of the ACA excludes Section 43 (which makes the Limitation Act applicable to arbitrations) from statutory arbitrations. The Court rejected this submission, clarifying that Section 18(3) contains a specific statutory fiction providing that the ACA applies as if the arbitration were pursuant to an arbitration agreement under Section 7(1).
Furthermore, Section 24 of the MSMED Act gives overriding effect to Sections 15 through 23 over any inconsistent law. As a special statute governing delayed payments to suppliers, Section 18(3) prevails over Section 2(4) of the ACA. Consequently, Section 43 of the ACA operates fully, subjecting arbitral claims under the MSMED Act to the Limitation Act. An adjudicatory body cannot entertain stale claims that would otherwise be impermissible in a civil suit.
Balance Sheet Disclosures under Section 22
Addressing whether the mandatory disclosure of unpaid debts in a buyer’s balance sheet under Section 22 extends limitation, the Court held that this must be evaluated on a case-to-case basis. While balance sheet entries can operate as an acknowledgment of debt under Section 18 of the Limitation Act, accompanying notes or audit qualifications may rebut such acknowledgment.
The Court partly allowed the appeals, upholding the applicability of limitation to arbitrations while removing any restriction against conciliating time-barred claims.
Read the Judgment here.