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The Limitation Act to apply to Arbitration proceedings commenced under the MSMED Act

The Supreme Court passed a common Judgment in the case M/s. Silpi Industries v. Kerala State Road Transport Corporation and M/s. Khyaati Engineering V. Prodigy Hydro Power Pvt. Ltd. ruled that the Limitation Act of 1963 will be applicable to the arbitration proceedings initiated under section 18(3) of Micro, Small and Medium enterprises development act, 2006 (MSMED).


In M/s. Silpi Industries Supra, Kerala State Board Transportation (“KSRTC”), the respondent, proposed a tender for the supply of thread rubber for tire reconstruction. The petitioners/appellants, M/s. Silpi Industries was awarded purchase orders. According to the provisions of the purchase order, the appellants were to receive 90 percent of the entire purchase price upon the supply of the materials, with the remaining 10 percent payable subject to the final performance analysis. This was the case because the appellant stipulated that the thread rubber they supplied must run a certain number of kilometers before it could be used. The Appellants, therefore, addressed the Industrial Facilitation Council, {formerly created under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (IDPASC)} when the 10% balance money was not paid as per the purchase order.

The Appellants' claims were referred to arbitration under the provisions of the Arbitration & Conciliation Act 1996 (“1996 Act”) after the conciliation failed. The awards were made in favor of the claimants, and they were contested by filing C.A.Nos.1570-1578 of 2021 and other motions to set them aside under Section 34 of the 1996 Act. Respondents filed appeals under Section 37 of the 1996 Act before the High Court of Kerala in Ernakulam after their applications were denied.

In M/s. Khyaati Engineering Supra, the Appellant and Respondent, in this case, have agreed to provide and install hydro-mechanical equipment for two 3 MW Baner-II SHP units. The Parties had entered into an agreement consequent to which the Appellant filed a Claim Petition before the Micro and Small Enterprises Facilitation Council, which was established under the provisions of the MSMED Act, alleging that, despite fulfilling all of its contractual responsibilities, the Respondent has refused to make payments as agreed. The claim was filed in connection with the Respondent delivery of goods and services. The Appellant had claimed that the Respondent appeared before the Facilitation Council after receiving notice from the Council. Following which, the Respondent filed an application with the Madras High Court.. The stated application was submitted under Section 11(6) of the 1996 Act, requesting the appointment of a second arbitrator to resolve disputes between the parties arising from a breach of contract terms and conditions for the sale of hydro-mechanical devices.


The following issues were raised before the Court:

  1. Whether the Indian Limitation Act, 1963, applicable to arbitration procedures brought under Section 18(3) of the Micro, Small, and Medium Enterprises Development Act, 2006?

  2. Whether a counterclaim be filed in such arbitration proceedings?


With respect to the applicability of the Limitation Act, 1963 to arbitration procedures under the terms of the Micro, Small, and Medium Enterprises Development Act, 2006, the Court noted several pertinent portions of the Act.

According to Section 15 of the MSMED Act, when a supplier provides goods or renders services to a customer, the buyer must pay on or before the agreed-upon date in writing, or, if no agreement is reached, before the appointed day. Section 16 specifies the date from which interest will accrue and the rate of interest that will be charged if the payment is not made. Sections 17 and 18 of the MSMED Act deal with the amount due recovery process.

If there is a disagreement about an amount owed under Section 17, the Micro and Small Enterprises Facilitation Council must be consulted. The Council is empowered to undertake conciliation in the matter or seek assistance from any institution or center that provides ADR services by referring the matter to such institution for conciliation. If the conciliation process fails, as provided for in Section 18(2) of the Act, the process is terminated under Section 18(3) of the Act. Following that, the Council shall either arbitrate the dispute itself or refer it to any institution or center that provides ADR services for such arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 are made applicable as if the arbitration was conducted in accordance with an arbitration agreement between the parties, as set forth in subsection (1) of Section 7 of the 1996 Act.

The limitation act of 1963 is applicable to arbitrations governed by Section 18(3) of the 2006 Act, according to the high court. Section 43 of the 1996 Act governs the application of the Limitation Act of 1963 to arbitrations. Section 43 reveals that the Limitation Act of 1963 applies to arbitrations in the same way that it does to judicial proceedings. When a settlement regarding a dispute between the parties cannot be reached under Section 18 of the 2006 Act, the Micro, and Small Enterprises Facilitation Council must take the dispute to arbitration under Section 18(3) of the 2006 Act, or it may refer the dispute to an institution or center to provide ADR services under the Arbitration and Conciliation Act 1996.

Therefore, the Supreme Court believed that the High Court correctly relied on the judgment in the case of Andhra Pradesh Power Coordination Committee and held that the Limitation Act, 1963 is applicable to arbitration proceedings under Section 18(3) of 2006 because Section 43 of the Arbitration and Conciliation Act, 1996 expressly applies the provisions of the Limitation Act, 1963 to arbitrations.

With respect to the maintainability of a counterclaim in arbitration proceedings filed pursuant to Section 18(3) of the MSMED Act. The Court observed that the amount recovered under Section 17 of the MSMED Act is based only on the amounts claimed by the provider under Section 16 of the MSMED Act.

In the case of micro, small, and medium enterprises, where there is no agreement for the resolution of conflicts through arbitration. A party may file a claim in civil court or any other forum in case of a dispute. In which case the provisions of the MSMED Act will take precedence over the provisions of the other legislation, particularly when the latter provides an overriding clause under Section 24.

If a seller is protected under the MSMED Act, the seller has every right to file a claim with the competent body. The conflict can be settled if the parties agree to have their disagreements handled through arbitration. In light of the legislative requirements and mechanisms given by the MSMED Act, any agreement between the parties is to be ignored.

Further, apart from the provision under Section 23(2A) of the MSMED Act, it is to be noticed that if counterclaim is not permitted, the buyer can get over the legal obligation of compound interest at 3 times the bank rate and the 75% redeposit contemplated under Sections 16 and 19 of the MSMED Act.


The MSMED Act was introduced to protect the Micro, Small and Medium Enterprises (MSMEs) and therefore can be regarded as a safeguard legislation for the MSMEs. Having said that, it is important that the dispute resolution mechanism provided in the MSMED Act be in consonance with the Arbitration and Conciliation Act 1996. Therefore, the Supreme Court has rightly applied the limitation provisions applicable on a regular arbitration proceedings in India to the dispute resolution proceedings under the MSMED Act.

Authored by:

  1. Mr. Pratik Jain, Managing Associate

  2. Ms. Sakshi Nair, Legal Intern

© N.C. Jain Advocate & Associates

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