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Applicability Of Limitation Act, 1963 In Arbitration Proceedings Under Msmed Act, 2006

The motive of the Limitation Act, of 1963 is to reduce unnecessary litigation and to reduce the burden and chaos of the court. Section 43 of the Arbitration & Conciliation Act,1996 shall apply to arbitrations as it applies to proceedings in court. The period between the commencement of arbitration and the order of the court shall be excluded while computing the period of limitation. In "Shilpi Industries vs Kerala State Road Transport Corporation" the court has created a clear and settled position of law regarding the applicability of the Limitation Act, 1963 in arbitration proceedings under the MSMED Act, 2006.

Factual Matrix
The Kerala State Road Transport Corporation (KSRTC) invited tenders for the supply of thread rubber for tyre rebuilding. Silpi Industries were given the purchase order under which the 90% of the total purchase price was payable to them on the supply of material. The remaining 10% was to be paid if the condition that the thread rubber supplied by Shilpi Industries runs certain kilometers is fulfilled.

When such a balance amount of 10% was not paid, Shilpi Industries approached the Industrial Facilitation Council under MSMED Act. However, the conciliation proceedings failed, and the matter was referred to arbitration under the Arbitration and Conciliation, 1996 Act (The 1996 Act).

  1. Whether the provisions of the Indian Limitation Act, 1963 is applicable to arbitration proceedings initiated under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006? and
  2. Whether counterclaim is maintainable in such arbitration proceedings?

The Hon'ble court stated that MSMED Act repealed the IDPASC Act in 2006 and was enacted to aid and facilitate the development and competitiveness of micro, small and medium enterprises ("MSME's"). The MSMED Act was a comprehensive Central enactment that was aimed at filling the gaps identified in the IDPASC Act.

The Supreme Court further noted that from the Statement of Objects and Reasons of both legislations, it became clear that the IDPASC Act was confined only to delay in payments owed to small-scale/ancillary undertakings; however, the MSMED Act covered all kinds of MSME's, dealt with the liability of a buyer and provided a mechanism in case of default under Chapter V of the Act (covering Sections 5 to 19).

Applicability of the Limitation Act, 1963 to Arbitrations initiated under the MSMED Act
The Supreme Court noted that in case a dispute arose under Section 17 of the MSMED Act, a reference must be made to the Council. The Council was then to refer the parties to conciliation, and if conciliation proceedings failed, the Council was to refer the dispute to arbitration (either administered by itself or by any institution or centre deemed fit by the Council) under Section 18 of the MSMED Act. In these proceedings, the 1996 Act would apply.

The Supreme Court further observed that High Court correctly placed reliance on the judgment in the case of Andhra Pradesh Power Coordination Committee[1] ("AP Power") which dealt with the issue of the applicability of the Limitation Act to arbitrations under Section 18 of the MSMED Act and answered the same in the affirmative. The Supreme Court further held that a perusal of Section 43 of the Limitation Act reveals that it applies to arbitrations, and that the provisions of the 1996 Act apply in the same manner to arbitrations initiated under the MSMED Act as if there exists an agreement between the parties under Section 7(1) of the 1996 Act.

In light of the above, the Supreme Court unequivocally held that the provisions of the Limitation Act apply to arbitrations initiated under Section 18 of the MSMED Act.

Maintainability of counter-claim in arbitration proceedings initiated under the MSMED Act
The Court held that Section 23 of the 1996 Act will apply which deals with statement of claim and defence. Further, Section 23(2A) will also be applicable which gave a right to the Respondent to submit a counter-claim or plead set-off regarding the claims, as long as the pleas and claims were within the scope of the concerned arbitration agreement.

The Supreme Court observed that Section 23(2A) was inserted via an amendment in 2016. The amendment was introduced to provide for speedy disposal of arbitrations. Thus, the aforementioned section was introduced to give the Respondent an opportunity to either submit a counter-claim or plead set-off. Further, since such a provision has been expressly inserted via amendment, the Court observed that there was no reason for curtailing the rights provided to the Respondent.

The Supreme Court further observed that if it were to disallow buyers from filing counterclaims in proceedings arising out of seller's claims, then it may lead to multiplicity of proceedings and conflicting opinions before various fora. It was also observed that MSMED Act is a special beneficial legislation whereas the 1996 Act is a general law and the statutory arbitration prescribed under the MSMED Act prevails over 1996 Act.

The Supreme Court further observed that at first, the MSMED Act prescribes compulsory conciliation at the first instance. Secondly, should those proceedings fail, the Council or a centre/institution designated by it is to administer arbitration. Thirdly, if the award is passed in favour of the seller, and if it is challenged, 75% of the award amount is to be deposited.

The Supreme Court also observed that the benefits of the MSMED Act's dispute resolution mechanism cannot be denied merely on the ground that counterclaim filed by a buyer is not maintainable. The current situation gives the buyer the option to avoid the Council's jurisdiction (and the MSMED's arbitration mechanism) by raising a counterclaim and dragging the seller to a new arbitral tribunal.

In light of the considerations above, the Supreme Court held that a buyer can make its counter-claim and/or plead set-off in the arbitral proceedings under the MSMED Act itself so as to not defeat the purpose of the MSMED Act, to reduce multiplicity of proceedings and the chance of contrary findings by different fora.

The Supreme Court also placed reliance on the judgment in the case of Edukanti Kistamma (Dead) through LRs[2] to hold that a beneficial special statute prevails over a general one. Thus, the Supreme Court held that the MSMED Act shall prevail over the 1996. In light of this, even if an agreement to arbitrate exists between the buyer and the seller, it is to be ignored in favour of statutory arbitration proceedings under the MSMED Act.

Although the Supreme Court held that counterclaim and set-off are maintainable before statutory authorities under the MSMED Act, it did not extend the benefit of this to Appellant II because on the date of supply of goods and services, Appellant II was not registered, as mandated under Section 8 of the MSMED Act.

This judgment puts to rest significant issues that had created a conundrum regarding the interplay of the MSMED Act and the 1996 Act. Firstly, frivolous and time barred claims will be ousted, which goes a long way in reposing faith in enforcement of contracts, ease of doing business in India and curbs the misuse of statutory arbitration process.

SMEs constitute a major chunk of economic activity, and many businesses will finally be to write off stale claims from their books. Secondly, by affirming the mandatory nature of the dispute resolution mechanism under the MSMED Act, it will prevent buyers from circumventing the jurisdiction of statutory forums.

Lastly, by allowing the buyer to make a counter claim/plead set-off in the statutorily referred arbitration itself, the Supreme Court has met the objectives of both, the MSMED Act and the 1996 Act, as this avoids multiplicity of proceedings, protects the seller's rights, and ensures speedy resolution of disputes. However, the judgment will adversely affect rights of unregistered entities as it lays down mandatory registration to avail benefits under the MSMED.


Award Winning Article Is Written By: Mr.Shubham Agarwal
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Authentication No: JL355927639231-12-0723

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