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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

A bank holds a pledge of gold ornaments from Sunita for a loan and also a lien on her deposit. Sunita defaults, and the bank wants to enforce its rights against the pledged ornaments. Under the SARFAESI Act, 2002, section 31, what is the position?

The SARFAESI Act does not apply to a pledge of movables within section 172 of the Contract Act. Section 31(b) excludes such pledges, so the bank must enforce through its rights as pawnee rather than through SARFAESI measures.

  1. AThe Act applies to a pledge of movables within section 172 of the Contract Act
  2. BThe Act does not apply to a pledge of movables within section 172 of the Contract ActCorrect
  3. CThe Act applies only to liens, not to pledges
  4. DThe Act applies to pledges only if the loan exceeds Rs 1 lakh

Explanation

Section 31(b) excludes a pledge of movables within the meaning of section 172 of the Contract Act from the Act, and section 31(a) similarly excludes liens. So the bank cannot use SARFAESI enforcement on the ornaments and must rely on the Contract Act rights of a pawnee. The Rs 1 lakh limit in clause (h) is a separate exclusion and does not make pledges covered.

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