Aryan Alampalli

Source: Bar & Bench

This article examines whether mandatory conciliation under Section 18 of the MSMED Act meaningfully serves its intended purpose of speedy dispute resolution. Analysing the Supreme Court’s recent ruling excluding the Limitation Act from conciliation and the evolving jurisprudence, the piece highlights how statutory conciliation remains largely ineffective. It further critiques the 2024 Draft Arbitration and Conciliation Bill for diluting conciliation’s legal standing and creating inconsistencies within the MSME framework. Ultimately, it questions whether conciliation has become a procedural formality and argues for legislative reform to make it directory rather than mandatory.

Introduction

One of the fundamental reasons for passing the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) is to ensure speedy resolution of disputes of small businesses and protect their commercial interests. To this end, Section 18 of the MSMED Act establishes a distinct two-stage dispute resolution framework, where any payment dispute is first referred to the Micro and Small Enterprises Facilitation Council (“MSEFC”) for mandatory conciliation, followed by arbitration if the conciliation fails. A key legal question has emerged within this framework: to what extent do established procedural laws, such as the Limitation Act, 1963 (“Limitation Act”) apply?

This article delves into the recent Supreme Court (“Court”) judgment in M/S Sonali Power Equipments Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board, Mumbai (“Judgment”), which clarifies the inapplicability of the Limitation Act to conciliation proceedings. It then critically examines the changing jurisprudence of the MSMED Act, analyses the practical inefficiencies of mandatory conciliation, and explores the potential impact of the proposed Draft Arbitration and Conciliation Bill, 2024 (“2024 Bill”) on this entire framework. A key aspect of this piece highlights the detrimental impact the 2024 Bill has on the Arbitration and Conciliation Act, 1996 (“A&C Act”) to the extent of conciliation, which has been overlooked largely by existing literature. By placing it on the same pedestal as mediation, if not lower, the efficiency of conciliation has been brought into question within the framework of the MSMED Act.

The Current Judicial Stance

Before delving into the nuances of the Judgment, it is essential to understand the present judicial stance on the MSMED Act. In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (“Mahakali Foods”), the Court addressed the conflict between a contract’s private arbitration clause and the statutory mechanism under the MSMED Act. The court’s holding that Section 18 is a “deeming provision” is a critical point (¶26). It means that the MSMED Act, as a special law for the benefit of MSMEs, creates a legal fiction: once a party invokes the MSFEC’s jurisdiction, a statutory arbitration agreement is deemed to exist, overriding any pre-existing private arbitration agreement. This ensures that MSMEs can access the specific, time-bound remedy provided by the MSMED Act, regardless of what their contract says.

Similarly, the Court in Silpi Industries v. Kerala State Road Transport Corporation (“Silpi”) tackled a significant question about the applicability of limitation laws. The Court clarified that while the dispute resolution process under Section 18 begins with mandatory conciliation, once it progresses to arbitration, the provisions of the A&C Act, come into play (¶23). It was initially held in Consolidated Engineering Enterprises v. Principal Secretary Irrigation Department, that due to an absence of limitation periods prescribed under the A&C Act, Section 43 makes the Limitation Act applicable to arbitration proceedings (¶5).

Reaffirming Applicability of Limitation Act on Statutory Arbitration

The Bombay High Court in Delton Electricals v. Maharashtra State Electricity Distribution Co. Ltd. (“Delton”) held the Limitation Act to be applicable even though it acknowledged that Section 2(4) provides for the exclusion of Section 43 to statutory arbitrations (¶34). The Court erroneously presumed that the MSMED Act allows parties to refer disputes to both civil courts and the MSEFCs (¶5). It would lead to an incongruous situation if the principle of limitation did not extend to the MSEFC but only to civil courts. This stance by the Bombay High Court is per incuriam since the removal of Clause 19 of the MSME Bill from the final law in force, suggests the legislature’s intent to not include civil courts within the ambit of the MSMED Act.

The present Judgment reaffirms the view of the Court in Silpi and addresses the question regarding the applicability of Limitation Act in Section 18 proceedings of the MSMED Act due to Section 2(4) of the A&C Act. The Court held that Section 18(3) of the MSMED Act will prevail over Section 2(4) of the A&C Act on two grounds: (i) the non-obstante clause in Section 18(1) and (ii) the overriding effect of Section 24. This aligns with the decision in Mahakali Foods which held that the MSMED Act is a special law and will prevail over the provisions of the A&C Act which is a general law. Thus, the rationale applied by the Court in the present Judgment is more legally consistent than the Delton case.

The Court also briefly addressed the possibility of a fresh limitation period arising due to Section 22 of the MSMED Act, which requires disclosure of unpaid amount in the buyer’s financial statements to be read with Section 18 of the Limitation Act. Referring to Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, the Court held the entry made in the balance sheet must be examined on a case-to-case basis to determine whether it amounts to an acknowledgement of debt as per the requirements of Section 18 of the Limitation Act and accordingly compute a fresh limitation period (¶9).

Change in Position on Statutory Conciliation

Conciliation has not been defined per se under the A&C Act or the MSMED Act. The Court in Afcons Infrastructure Ltd. & Anr. v. Cherian Varkey Construction Co. (P) Ltd. aptly defined features of conciliation. It is a non-adjudicatory process where the conciliator does not decide the dispute but facilitates a mutually agreed settlement between the parties (¶25). Both parties are expected to cooperate in good faith and once agreed upon, the settlement is recorded in a written agreement signed by the parties. This is final, binding, and enforceable as an arbitral award.

Section 18(2) of the MSMED Act provides that conciliation must be conducted as per Sections 65 to 81 of the A&C Act. Upon perusal of the same, it is evident that there is no provision that extends the applicability of the Limitation Act to conciliation proceedings. It has also been established in M.P. Steel Corporation v. CCE that the Limitation Act only applies to suits, appeals, and applications filed before courts (¶17, 19). Unlike civil proceedings wherein rights and liabilities of parties are to be settled, conciliation proceedings are voluntary and may be terminated under Section 76 of the A&C Act, making it non-coercive in nature. Thus, in the present case, the Court excluded the application of the Limitation Act to conciliation proceedings under the MSMED Act.

It went on to further add how distressed suppliers could still avail remedies equivalent to the outcome arising from conciliation under Section 18(2) of the MSMED Act. The supplier’s right to recover principal and interest continues beyond the limitation period and may be enforced through appropriation of payments, recovery from a surety, or enforcement of lien or security. Further the Court highlighted that contracts for repayment of a time-barred debt is recognised under Section 25(3) of the Indian Contract Act, 1872. The recommendations provided by the Court are valid recourses to hold the principle of conciliation alive beyond limitation. Nonetheless, the author believes that these are not effective routes for distressed parties, since they have filed an application under the MSMED Act for speedy remedy and directing them to other voluntary mechanisms will be counterproductive.

Conciliation vis-à-vis the Draft Arbitration and Conciliation Bill, 2024

The draft Arbitration and Conciliation Bill, 2024 (“2024 Bill”) brings about key omissions in the existing A&C Act which undoubtedly lower the statutory recognition that conciliation has been given. The words “as also to define the law relating to define the law relating to conciliation” in the Long Title and “and Conciliation” in the Short Title of the A&C Act is proposed to be omitted. Paragraph 3 and 4 of the Preamble which relate to conciliation are to be omitted as well which signify a change in the objectives of the new A&C Act.

Another major change lies in the amendment of Section 30 which provides for settlement. This section deals with settlement mechanisms an arbitral tribunal may encourage disputing parties to resort to, during proceedings. By omitting conciliation, the 2024 Bill prescribes only mediation for disputing parties to resort to under Sub-Section (1) of Section 30. A pivotal amendment proposed to Sub-Section (2) is the substitution of the words “an arbitral award” with “a mediated settlement agreement enforceable in accordance with the provisions of Mediation Act, 2023.” This is concerning since a settlement agreement arising from conciliation proceedings under Part III of the A&C Act under Section 74, is generally given the same effect as an arbitral award achieved under Section 30. The 2024 Bill fails to account for this cascading effect as this will have a potential repercussion for proceedings under Section 18 of the MSMED Act. 

Section 27 of the Mediation Act, 2023 deals with enforcement of mediated settlement agreements and it is to be enforced as if it were a judgment or a decree passed by a court in accordance with Civil Procedure Code, 1908 (“CPC”). Hence, if the 2024 Bill is passed, there will be an inconsistency in the remedies provided under Section 18. If parties reach a settlement agreement under conciliation proceedings, they would have more grounds for appeal under CPC than an arbitral award obtained through arbitration which has limited grounds under Section 34(2)(a) of the A&C Act. These limited grounds were recently discussed in length by the Court in Gayatri Balasamy v. ISG Novasoft Technologies Limited, which limited the powers of courts in modifying and setting aside arbitral awards.

Conciliation Under the MSMED Act – An Empty Formality?

Section 29A of the A&C Act provides 12 months with a maximum extension of 6 months to pass an arbitral award. Section 18(5) of the MSMED Act, on the other hand, provides 90 days for every reference made under this section to resolve the matter. While the latter stipulated time period takes precedence over the former as it is a special law as held in Mahakali Foods, this time period prescribed is too short to conduct effective arbitration.

Section 18(2) states “the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution.” In the case of Delhi Airtech Services (P) Ltd. v. State of U.P., the Court read that the term “shall” be read as “may”, giving it a directory effect, only where doing so would achieve the ends of legislative intent behind the substantive provision as well as the scheme of the entire statute in question (¶122). While the legislative intent is speedy resolution of disputes and reaching a settlement agreement is ideally desirable, in reality it is not the most effective route. The author calls for a legislative amendment to make conciliation directory and not mandatory under Section 18(2), since conciliation can be availed at any point as long as the dispute persists as held in the present Judgment. Distressed parties should instead be allowed to proceed to arbitration first, since it does not entertain time-barred claims.

As of 28^th November 2025, the number of applications accepted by the MSEFC is 1,82,676. Out of this 24,238 MSEs have reported mutual settlements and 52,255 applications have been resolved and disposed by the MSEFC. This means that conciliation has a success rate of 13.23% and arbitration has a success rate of 28.61%, under the mechanism prescribed under Section 18. While these are fairly simple statistics and a fuller discussion of the data is beyond the scope of their paper, it does fairly suggest that arbitration is a relatively more effective form of ADR under Section 18. Thus, it should ideally be provided as an option for disputing parties to opt first under Section 18 because: (i) There is a time-crunch since the time stipulated under Sub-Section 5 is 90 days; (ii) Time-barred claims cannot be admitted to arbitration whereas for conciliation, they can.

Conclusion

As held, the Limitation Act does not apply to conciliation proceedings under Section 18 of the MSMED Act and this can initially be a sigh of relief to distressed suppliers. This decision taken by the Court however, was on the basis of the nature of this form of ADR and does not factor in the practicalities of conciliation as a mechanism. There is an urgent need for a legislative amendment making conciliation directory and not mandatory as currently stipulated, since the stipulated time is a short period of 90 days to resolve the dispute under Section 18.

To add on to the existing quandary, the proposed amendments in the 2024 Bill subtly sideline conciliation by not just removing it from the title and preamble but by removing it as a process of reaching a settlement agreement under Section 30. That may require legislative clarity as to why this section proposes to deem the settlement agreement as a mediated settlement agreement instead of an arbitral award, and the same being applied to those settlement agreements arising out of conciliation proceedings.

Aryan Alampalli is a third-year law student at National Law Institute University, Bhopal.