“Conciliation Unshackled, Arbitration Constrained” – The Supreme Court Crafts a Dual-Limitation Regime under Section 18 of the MSMED Act

1. Introduction

The Supreme Court’s decision in M/s Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board 2025 INSC 864 (“Sonali Power”) resolves a long-standing controversy on how limitation law interacts with the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”). While lower courts had delivered conflicting answers, the Supreme Court now bifurcates the enquiry:

• Conciliation under Section 18(2) – Free from the Limitation Act, 1963; even time-barred debts may be settled.
• Arbitration under Section 18(3) – Squarely governed by the Limitation Act via Section 43 of the Arbitration and Conciliation Act, 1996 (“ACA”); stale claims cannot be adjudicated.

By doing so, the Court preserves suppliers’ ability to negotiate settlements of old claims, while shielding buyers from coercive adjudication of those same stale demands. The judgment also clarifies that entries mandated in buyers’ financial statements under Section 22 of the MSMED Act may constitute an acknowledgement of debt, but only after fact-specific scrutiny.

2. Background of the Dispute

• Parties – Nine transformer manufacturers (appellants) registered as micro-enterprises; Maharashtra State Electricity Board (“MSEB”) and its officers (respondents).
• Transactions – Supplies between 1993-2004; large amounts remained unpaid.
• Initial proceedings – References filed in 2005-06 under the repealed Interest on Delayed Payments Act, 1993; carried forward to the MSME Facilitation Council, Nagpur.
• Award – Council’s arbitral award (2010) granted principal plus hefty interest.
• Challenge chain – Set aside by Commercial Court (2017) as time-barred; Division Bench raised nine limitation-related issues; Full Bench (2023) held limitation applicable to both conciliation and arbitration; suppliers appealed to SC.

3. Summary of the Supreme Court’s Decision

1. Leave granted; appeals partly allowed.
2. Conciliation: Limitation Act does not apply; “amount due” includes time-barred debt for purposes of settlement; Council may therefore entertain such references.
3. Arbitration: Limitation Act does apply; Section 43 ACA attracted by statutory fiction in Section 18(3) MSMED; time-barred claims cannot be adjudicated.
4. Section 22 disclosures: Balance-sheet entries can restart limitation under Section 18 of the Limitation Act, but only if the particular entry amounts to an unequivocal acknowledgement.
5. The High Court judgment is set aside only insofar as it barred conciliation of time-barred debts; rest affirmed.

4. Analysis

4.1 Precedents Considered

• Silpi Industries v. Kerala SRTC (2021) 18 SCC 790 – Limitation applies to Section 18(3) arbitration. Affirmed.
• Gujarat SCCL v. Mahakali Foods (2023) 6 SCC 401 – MSMED Act is a special statute overriding ACA inconsistencies. Relied upon.
• State of Kerala v. V.R. Kalliyanikutty (1999) 3 SCC 657 – “Amount due” excludes time-barred debt in coercive recovery statutes. Distinguished.
• A.P. Power Coordination Committee v. Lanco (2016) 3 SCC 468 – Limitation applies to judicial proceedings before State Commission. Clarified.
• TANGEDCO v. PPN Power (2014) 11 SCC 53 – Not directly on limitation; explained.
• Asset Reconstruction Co. v. Bishal Jaiswal (2021) 6 SCC 366 – Balance-sheet acknowledgements and Section 18, Limitation Act. Applied.

4.2 The Court’s Legal Reasoning

A. Distinction Between Conciliation and Arbitration

Conciliation is non-adjudicatory, voluntary and completely settlement-oriented. Arbitration is adjudicatory, ending in an enforceable award. This conceptual difference justifies different limitation treatment.

B. Statutory Textual Analysis

C. Reconciling with ACA Section 2(4)

Section 2(4) excludes ACA §43 for statutory arbitrations unless the special statute says otherwise. Because Section 18(3) expressly reincorporates the ACA in toto, the exclusion is overridden. The Court therefore rejects the argument that Silpi was per incuriam.

D. Why “Amount Due” Includes Time-Barred Debt for Conciliation

• Expiry of limitation extinguishes the remedy, not the right.
• Section 25(3) Contract Act validates a written promise to pay a time-barred debt; a settlement agreement reached via Section 18(2) conciliation is of that nature.
• Conciliation is not “coercive” or “judicial” (unlike revenue-recovery proceedings in Kalliyanikutty); thus public-policy concerns of enforcing stale claims do not arise.

E. Balance-Sheet Disclosures and Acknowledgement (Section 22 MSMED)

The Court acknowledges Bishal Jaiswal: a mere statutory disclosure can restart limitation only if it is an unqualified admission of liability. Auditors’ notes or qualifications may negate its evidentiary value. The issue will turn on facts in individual cases.

4.3 Potential Impact

1. Strategic Behaviour – Suppliers can safely approach Councils to negotiate old claims without limitation hurdles; buyers must engage or risk interest escalation.
2. Docket Management – Arbitrators (or Commercial Courts in Section 34 petitions) will summarily dismiss stale claims, streamlining proceedings.
3. Corporate Governance – Balance-sheet acknowledgements now carry heightened litigation risk; companies may add clearer disclaimers.
4. Legislative Guidance – Parliament may consider codifying a specific limitation period for MSME references to reduce ambiguity.
5. Broader ADR Jurisprudence – The judgment underscores that different ADR mechanisms can attract different procedural laws—a nuanced, context-specific approach.

5. Complex Concepts Simplified

• Limitation Period – The legally fixed time within which a claim must be brought; after expiry, courts/arbitrators cannot adjudicate it.
• Conciliation vs. Arbitration – Conciliation is like facilitated negotiation; arbitration is a private court delivering a binding verdict.
• Non-Obstante Clause – A statutory phrase (“notwithstanding anything contained…”) showing the provision overrides conflicting laws.
• Deeming Fiction – Legislative technique that “pretends” a fact; here, the law treats statutory arbitration as if parties signed an arbitration agreement.
• Acknowledgement of Debt – A written, signed admission by a debtor that restarts the limitation clock (Section 18 Limitation Act).

6. Conclusion

Sonali Power draws a clear doctrinal boundary: negotiation can embrace even stale demands, whereas adjudication cannot. By uncoupling conciliation from limitation but tethering arbitration to it, the Court balances MSME protection with commercial certainty for buyers. Future litigants must therefore:

• Scrutinise the age of claims before pushing for arbitration; limitation objections remain potent.
• Exploit conciliation proactively—valuable even for time-barred invoices.
• Draft financial-statement notes with precision; inadvertent acknowledgements could reopen limitation.

Above all, the judgment reinforces that statutory frameworks must be read holistically, respecting both their specialised purposes and the general procedural safeguards embedded in India’s limitation regime.