Section 31 of the SARFAESI Act, 2002: Cases Where the Act Does Not Apply

Section 31, in Chapter VI (Miscellaneous) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, identifies categories of property, interests and financial claims excluded from the Act. These exclusions are important when deciding whether a secured creditor may invoke SARFAESI enforcement procedures.

What does Section 31 provide?

The section begins: "The provisions of this Act shall not apply to" the categories set out below. Each clause must be examined on its own facts; an exclusion cannot be assumed merely from a description in loan records.

Section 31(a): Liens

A lien on goods, money or security arising under the Indian Contract Act, 1872, the Sale of Goods Act, 1930, or another law in force. A lien generally refers to a legally recognised right to retain possession of property as security for an obligation.

Section 31(b): Pledge of movables

A pledge of movable goods within Section 172 of the Indian Contract Act, 1872. That section defines a pledge as bailment of goods as security for payment of a debt or performance of a promise.

Section 31(c): Aircraft

Creation of security in an aircraft as defined in the statutory aircraft legislation referred to in this clause. The section's original cross-reference is to Section 2(1) of the Aircraft Act, 1934; relevant subsequent aviation legislation and savings provisions should also be checked for a current transaction.

Section 31(d): Vessels

Creation of a security interest in a vessel as defined in Section 3(55) of the Merchant Shipping Act, 1958, as referenced by the provision. Check the applicable maritime legislation for transactions arising after any replacement or commencement of newer enactments.

Section 31(e): Omitted

Clause (e), which formerly related to conditional sale, hire-purchase and lease interests, was omitted by Act 44 of 2016, Section 22, with effect from 1 September 2016. It must not be presented as a subsisting exclusion.

Section 31(f): Unpaid seller

Rights of an unpaid seller under Section 47 of the Sale of Goods Act, 1930, which addresses the unpaid seller's lien while in possession of goods in specified circumstances.

Section 31(g): Property exempt from attachment or sale

Properties not liable to attachment (excluding properties specifically charged with the debt recoverable under the SARFAESI Act) or sale under the first proviso to Section 60(1) of the Code of Civil Procedure, 1908. The exception for property specifically charged with the debt is significant.

Section 31(h): Financial assets not exceeding Rs. 1 lakh

A security interest securing repayment of a financial asset not exceeding Rs. 1,00,000. This concerns the amount of the financial asset described by the clause, not a general exemption for every small instalment.

Section 31(i): Agricultural land

A security interest created in agricultural land. Whether land is agricultural for this purpose may depend on its actual character and use and the surrounding facts; a revenue-record description alone is not necessarily conclusive.

Section 31(j): Amount due below 20%

Any case in which the amount due is less than 20% of the principal amount and interest thereon. This is a statutory threshold to be evaluated using the relevant outstanding amount and the wording of the clause.

How Section 31 affects SARFAESI proceedings

A secured creditor seeking to enforce a security interest, including by measures under Section 13, should first determine whether Section 31 excludes the particular security or claim. The exclusions operate as limitations on the applicability of the Act, rather than merely as discretionary defences.

For agricultural land, the land's actual use and character at the relevant time may be disputed. For a pledge or lien, the legal nature of the transaction matters. The threshold provisions in clauses (h) and (j) involve different tests and should not be conflated.

Legislative history and related provisions

2004 amendment: Act 30 of 2004, Section 17, modified clause (g), with effect from 11 November 2004, to exclude specifically charged property from the attachment exemption.
2016 amendment: Act 44 of 2016, Section 22, omitted clause (e) with effect from 1 September 2016.
Section 31A separately empowers the Central Government, subject to statutory parliamentary procedures, to exempt classes of banks or financial institutions. It is distinct from the categorical exclusions in Section 31.

Official legal sources

This is a general explanation of Section 31. For a specific dispute, verify the statutory text and amendments applicable on the relevant date, the security documents, and judicial interpretation.