Statutory Limitation on Claims under the Micro, Small and Medium Enterprises Development Act – Part I

[Shinoj Koshy and Purvi Khanna are at L&L Partners, Delhi]

One of the foremost requirements for the Micro, Small and Medium Enterprise (MSME) industry is the availability of credit and shorter working capital cycles. The working capital cycle of an MSME is the time taken to convert its receivables into cash, which is essential to run their small-scale operations.

The Interest on Delayed Payments to Small and Ancillary Industrial Undertakings Act, 1993 (the IDP Act) recognized the importance of access to capital and shorter cashflow cycles for MSMEs. The IDP Act mandated payment of interest to MSME vendors on delayed settlements of their dues. The Micro, Small and Medium Enterprises Development Act (MSMED Act) replaced the IDP Act in 2006.

In this two-part discussion, we investigate whether claims under the MSMED Act are barred by limitation. The changes introduced by the MSMED Act and the subsequent jurisprudence on the applicability of the Limitation Act, 1963 (Limitation Act) to claims under the MSMED Act provide the context to our discussion. In order to further our analysis, we propose to evaluate the provisions in context of the following fact pattern, which is not uncommon in the functioning of commercial establishments.

Imagine a situation where a corporate buyer purchases certain taxi services from a vendor (a ‘supplier’, as defined under the MSMED Act) at various periods. It is agreed that the buyer shall pay the supplier for the services as and when invoices are raised and sent to the buyer.

Under the MSMED Act, each time the buyer avails a taxi from a supplier, it has “accepted” a service. Payment against a service which is accepted by a buyer must be made within 15 days (or latest within 45 days, where agreed between the parties). For any payment not furnished within this period, it would constitute a delayed payment under the MSMED Act. The buyer must pay interest, compounded at three times the bank rate notified by the Reserve Bank of India, for the period of delay until the payment is finally made. Now, imagine our situation where the buyer has availed taxis on multiple occasions in a period of a month, between 1 January 2020 and 31 January 2020. The supplier furnished the invoice to the buyer by 28 February 2020 and the buyer made payments forthwith. The buyer, believing its payment to be in compliance with the 45-day period provided under the MSMED Act, makes full and final settlement of the dues owed to the supplier without accounting for any interest.

However, some of these “accepted” services are in fact, not invoiced to the buyer in time, i.e., taxi services availed between 1 January 2020 and 12 January 2020 have already exceeded the 45-day window for timely payment. These invoices were not raised and brought to the notice of the buyer for payment in time, and the buyer believing these payments to be made in time, did not account for interest payable on such amounts. The buyer learns of these unpaid interest amounts owed by it when the taxi-service provider approaches it on 28 February 2025 and demands payment along with compounded interest at three times the bank rate for the entire period of 5 years. Should its claim to unpaid amounts and the exorbitant interest rates it has accrued be payable, or should it, in the interest of justice and balancing of interests between parties, be treated as time barred against the buyer?

Changes in the dispute resolution mechanism

The MSMED Act provided for the establishment of MSME Facilitation Councils (MSME-FCs) as the one-stop shop for resolution of disputes under the MSMED Act.[1] MSME matters are consolidated before a single forum which provides sequentially for conciliation and, if unsuccessful, then arbitration.

Section 18 of the MSMED Act (Reference to Micro and Small Enterprises Facilitation Council) reads:

“18. (1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17 (Recovery of Amount Due), make a reference to the Micro and Small Enterprises Facilitation Council.

(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.

(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer to it any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act. …

 (5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.” [Emphasis added]

Section 18 of the MSMED Act, unlike section 6 of the IDP Act, omits the reference to suits as a means of recovery of amounts due to the supplier.

Section 6 (Recovery of amount due) of the IDP Act reads:

“(1) The amount due from a buyer, together with the amount of interest calculated in accordance with the provisions of sections 4 and 5, shall be recoverable by the supplier from the buyer by way of a suit or other proceeding under any law for the time being in force.

(2) Notwithstanding anything contained in sub-section (1), any party to a dispute may make a reference to the Industry Facilitation Council for acting as an arbitrator or conciliator in respect of the matters referred to in that sub-section and the provisions of the Arbitration and Conciliation Act, 1996 shall apply to such disputes as the arbitration or conciliation were pursuant to an arbitration agreement referred to in sub-section (1) of section 7 of that Act.” [Emphasis added]

Now, disputes initiated before the MSME-FC are meant to be resolved only through conciliation and, if such conciliation fails, an arbitration process is initiated between the parties. The provisions of the Arbitration and Conciliation Act, 1996 (Arbitration Act) apply to these arbitrations “as if the arbitration was in pursuance of an arbitration agreement”. We shall come to the significance of these words later.

Limitation under the MSMED Act

The MSMED Act is silent on the applicability of limitation to disputes referred to MSME-FCs. As discussed above, the MSMED Act provides for a mandatory arbitral remedy, governed by the Arbitration Act. According to the Arbitration Act, the Limitation Act does not apply to arbitrations under an enactment. Let us set out the framework to evaluate this position:

Section 43(1) of the Arbitration Act states that the Limitation Act applies “to arbitrations as it does to proceedings in courts”. Therefore, the Limitation Act is applicable to all disputes where parties agree in writing to submit the dispute to arbitration.

But, according to section 2(4) of the Arbitration Act, section 43 does not apply to arbitrations under a statute. Section 2(4) of the Arbitration Act reads:

“(4) This Part (Part I) except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except insofar as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder.” [Emphasis added]

Keeping in mind the above framework, the question of whether the Limitation Act applies to claims for dues owed to suppliers under the MSMED Act has been disputed in courts. In the first set of judicial decisions, confusion arose as to whether the MSMED Act provides for two remedies of dispute resolution: one before a civil court and the other before the MSME-FC. If both remedies were available, logically it should follow that the Limitation Act should apply consistently to both dispute resolution mechanisms.

This question was discussed, in foremost, by a division bench of the Bombay High Court in Delton Electricals v. Maharashtra State Electricity Board, (2017) 6 AIR Bom R 487. The argument of inapplicability of Limitation Act to statutory arbitrations, and thereby under the MSMED Act, (the Limitation Question) was brought up here.

The Bombay High Court did not analyse the Limitation Question and held the Limitation Act to be applicable to MSME disputes. It presumed that the MSMED Act provided disputing parties the ability to approach a civil court as well as refer their disputes to arbitration. In its opinion, rendering one remedial mechanism before courts subject to limitation while rejecting its application before MSME-FCs would create an incongruous situation. Acting on this ground of this imagined inconsistency, it held that the Limitation Act and the principle of laches should be applicable to proceedings before MSME-FCs. Based on our above discussion of the comparison of section 18 of the MSMED Act and section 6 of the IDP Act, we know that the only remedy available to suppliers for amounts owed to them is before MSME-FCs.

The Limitation Question was again adjudicated by the Bombay High Court in Sonali Power Equipment v. Chairman, Maharashtra State Electricity Board, 2018 SCC Online Bom 2253.According to the division bench in Sonali Power, under the MSMED Act there was no availability of recourse to courts to resolve disputes. Based on this discord with Delton on an understanding of law, it referred the Limitation Question to a larger bench of the Bombay High Court.

While evaluating the divergent views of the two division benches of the Bombay High Court, it is important to note that the Parliamentary Standing Committee of Industry in its 176^th Report on the Small and Medium Enterprises Development Bill, 2005 (MSME Bill) had suggested the removal of Clause 19 of the MSME Bill, which provided recourse to civil courts for recovery of amounts:

Recovery of Amount Due

“19. The amount due from a buyer, together with the amount of interest calculated in accordance with the provisions of Section 18, shall be recoverable by the supplier from the buyer by way of a suit or other proceeding under any law for the time being in force.” [Emphasis added]

This was based on the reason that civil disputes were detrimental to the interest of suppliers as they were time-consuming and involved “other procedural complexities”. The fact that the Parliament chose to omit clause 19 of the MSME Bill clearly demonstrates its intention to make a departure from the scheme of the IDP Act where both remedies were available. This background lends greater credence to the argument that the incongruity identified by the court in Delton was truly imagined.

Therefore, if there is no recourse to courts under the MSMED Act, the question before courts is whether limitation applies to arbitrations mandated under the MSMED Act. In subsequent cases (e.g., Shanti Conductors (P) Ltd v. Assam State Electricity Board, 2019 (1) SCALE 747 (Supreme Court), and Shah and Parikh Engineers v. Urmi Trenchless Technology Pvt Ltd, MANU/MH/0296/2019 (Bombay High Court)), it was held that the Limitation Act is applicable to MSME disputes, but without conclusively resolving the Limitation Question.

In Part II of this post, we reason why the Limitation Act should be made applicable to disputes under the MSME Act. [continued here]

– Shinoj Koshy and Purvi Khanna

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[1] Section 6 of the IDP Act and Section 18 of the MSMED Act.