Whether the Law of Limitation is Applicable to the Claims under the MSMED Act, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006)¹ (the 2006 Act) was enacted to facilitate, promote, develop and enhance the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. This need stemmed primarily from the point of view of ensuring that the small-scale sector grows into a medium sector.

This article aims at answering the question as to whether the law of limitation is applicable to the claims under the MSMED Act, 2006 and also suggests the way forward.

Brief history and object of the MSMED Act, 2006²

The MSMED Act, 2006 came into effect on 16-6-2006. The 2006 Act repealed the earlier Act, viz. the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993³ (the 1993 Act) by virtue of Section 32 of the 2006 Act⁴. Prior to the enforcement of the 1993 Act, the small-scale industry was defined only by a notification under Section 11-B of the Industries (Development and Regulation) Act, 1951⁵ (the 1951 Act). Except the above two provisions, there was no other legal framework specifically for small-scale industry. The legislature, upon having realised that the small-scale industry sector is dynamic and vibrant, felt the need to fill in this lacuna and provide a legal framework. The need was also felt from the point of view of the country’s economy and a requirement to facilitate growth and development of this sector.

Judicial interpretation by the Supreme Court of India

The 2006 Act is a comprehensive legislation, however, there are certain loopholes which the legislation requires to incorporate within itself. One of the major loopholes is regarding the absence of an express provision in the 2006 Act, which clarifies, as to whether the law of limitation would be applicable to claims filed before the Micro, Small & Medium Enterprises (MSME) Council and if a counterclaim can be entertained under the 2006 Act.

The Supreme Court of India in Silpi Industries v. Kerala SRTC⁶, answered the 2 questions i.e.:

(a) whether the Limitation Act, 1963⁷, is applicable to the arbitration proceedings initiated under Section 18(3) of the 2006 Act⁸; and

(b) whether a counterclaim is maintainable in such arbitration proceedings.

The Supreme Court of India reiterated that the benefits under the 2006 Act can be claimed post registration as an MSME.

The intention of the 2006 Act,⁹ was promotion of small and medium enterprises, in view of their contribution to the Indian economy and in the eye of globalisation.

With this intention, object and reason in mind, the Supreme Court of India, answered the issue on application of the Limitation Act, 1963 to the arbitration proceedings initiated under the 2006 Act.

(i) With respect to the first question i.e. application of the Limitation Act, 1963 to arbitration proceeding under the MSMED Act, 2006 (the 2006, Act)—

In Silpi case¹⁰, the Supreme Court of India, was please to place reliance upon the judgment of A.P. Power Coordination Committee v. Lanco Kondapalli Power Ltd.¹¹ wherein, the Supreme Court of India held that the Limitation Act, 1963 will be applicable to all proceedings before a judicial/quasi-judicial forum, while it is deciding claims, arising out of a contract and referring the same to arbitration.

In the 2006 Act, in the event attempts to settle the dispute by way of conciliation fail, then the dispute can be referred to either institutional arbitration, Facilitation Council or alternate dispute resolution services (under Section 18(3) of the 2006 Act), which is when, the provisions of the Arbitration and Conciliation Act, 1996¹² become applicable. In scenarios where the dispute is referred to arbitration, the Arbitration and Conciliation Act, 1996 is deemed to be applicable, as if there was an agreement between the parties under Section 7(1) of the Arbitration and Conciliation Act, 1996¹³.

The Supreme Court of India further held that, as the provisions of the Limitation Act, 1963, are expressly applicable to the provisions of the Arbitration and Conciliation Act, 1996 (as per Section 43 of the Arbitration and Conciliation Act, 1996¹⁴) the same would thereby be applicable to the arbitration proceedings under Section 18(3) of the 2006 Act.

According to the author, another factor which the Supreme Court of India, could have also considered is the fact that, all claims before the Council under the MSMED Act, 2006 are money claims. Thus, attracting the Limitation Act, 1963.

(ii) With the respect to the second question i.e. Maintainability of counterclaim in the arbitral proceedings, under Section 17 of the MSMED Act, 2006¹⁵ (the 2006 Act)—

The Supreme Court of India observed that the Arbitration and Conciliation Act, 1996 is a general law and the 2006 Act is a special legislation and they both need to be read harmoniously. Upon harmonious reading of Section 18(3) of the MSMED Act, 2006 and Sections 7 and 23(2-A)¹⁶ of the Arbitration and Conciliation Act, 1996, it is held that counterclaim is maintainable before the statutory authority under the 2006 Act.

In conclusion, the Supreme Court of India reiterated that, the benefits under the MSMED Act, 2006 cannot be availed in a retrospective manner but prospectively, from the date of registration as an MSME.

Interpretation by different High Courts

(a) High Court of Punjab and Haryana—

Prior to the judgment of the Supreme Court of India, the High Court of Punjab and Haryana, in a judgment of 2015, in Equipment Conductors and Cables Ltd. v. Transmission Corpn. of Andhra Pradesh Ltd.¹⁷, was pleased to uphold the order passed by the Additional District Judge, Chandigarh, rejecting a challenge to an award, under Section 34 of the Arbitration and Conciliation Act, 1996¹⁸, on the ground that the claim under the MSMED Act, 2006 was time-barred. The High Court of Punjab and Haryana held that Section 43 of the Arbitration and Conciliation Act, 1996 is applicable to arbitral proceedings and hence, the award rejecting the claim on the basis of limitation was upheld.

(b) High Court of Bombay—

(i) The judgment by the Supreme Court in Silpi case¹⁹, was relied upon the High Court of Bombay in Bajaj Auto Ltd. v. State of Maharashtra²⁰ holding that it is now a settled law by the Supreme Court that, the law of limitation will be applicable to the claims under the 2006 Act.

(ii) In a Full Bench judgment of Sonali Power Equipment v. Maharashtra SEB²¹ along with other connected matters, the High Court of Bombay was pleased to answer the issue i.e. whether the provisions of the Limitation Act, 1963 are applicable to proceedings initiated under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006?

While answering the said issue, the High Court was pleased to rely upon the judgment of the Supreme Court of India in Silpi case²² and hold that the law of the Limitation Act, 1963 was applicable to claims under the 2006 Act. It observed that once conciliation fails, the claims would be governed by the Arbitration and Conciliation Act, 1996, and therefore the law of the Limitation Act, 1963 would be applicable.

The High Court went a step ahead and also held that even if the law of limitation by itself would not apply to conciliation proceedings before the Facilitation Council, however, the Facilitation Council cannot entertain a stale/dead claim at the behest of the supplier. It would therefore be obligatory upon the Facilitation Council, upon receipt of a claim by a supplier under Section 18(1) of the MSMED Act, 2006 to examine the same and determine whether it is a stale/dead claim and if it is so, decline to entertain the claim.

(iii) In another judgment of Gammon Engineers & Contractors (P) Ltd. v. Sahay Industries²³ the question of limitation, placed reliance on the judgment of Silpi case²⁴ and held that since filing a claim before the Facilitation Council is akin to invocation of under Section 21 of the Arbitration and Conciliation Act, 1996²⁵, the claim would be hit by limitation.

Conclusion and the way ahead

The Supreme Court of India has been pleased to clarify that the Limitation Act, 1963 will be applicable to all claims, under the 2006 Act, which get governed by the Arbitration and Conciliation Act, 1996.

Way ahead/forward

In view of the observations by the Supreme Court of India, according to the author, the legislature is required to take cognizance of the judgment and provide for the following in the 2006 Act, viz.

1. Make legislative amendments and insert provision in the 2006 Act, expressly clarifying that the law of limitation, shall be applicable to all claims under the MSMED Act, 2006.

2. Legislature would also need to clarify and provide for express provisions, defining the concept of “relevant date” from which the period of limitation shall start running or is to be calculated. This clarification will be instrumental in deciding whether a claim is barred by the law of limitation or not.

3. The legislature will also need to clarify if such an application of the law of limitation will be applicable to claims before the MSMED Act, 2006, will be applicable retrospectively or prospectively.

4. If the Facilitation Council should reject a claim on the ground of limitation, at the stage of conciliation.

The judgment of Silpi case²⁶ has come to the aid of the MSMEs by clarifying that the law of limitation will be applicable to all claims, which attract the Arbitration and Conciliation Act, 1996. The MSMEs thereby can initiate a claim considering the factor of limitation and take timely action.

However, it will be imperative upon the legislature to take cognizance of the observations of the Supreme Court of India and amend the 2006 Act, introducing express provision, on the issue of limitation. Such amendment will be necessary to promote the intention and objective of the 2006 Act i.e. to facilitate and promote the MSMEs.