I think you want something in there to ignore (or reset $section upon encountering) blank lines. Otherwise, the blank like after the code value will cause $code to be made empty. Of course, a non-blank, non-section line will do that also. For good error checking, you'd have to do something like this:

my ($section, $code, %passwds);
while (<>) {
    chomp;
    undef $section, next unless /\S/;

    # next line is equivalent to duff's; just showing a
    # different WTDI
    next if ($section) = /^\[(.*?)\]$/;

    if ($section eq 'CODE') {
        warn "overriding previous CODE" if defined $code;
        $code = $_;
        # CODE section automatically ends after one line
        undef $section;
    } elsif ($section eq 'PASS') {
        if ((my ($name, $pass) = split) != 2) {
           warn "bad input $_ ignored";
           next;
        }
        $passwds{$name} = $pass;
    } else { 
        warn "unexpected input $_; possibly invalid section $section";
    }
}
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