Difference between Sections 397 and 398 :
Under section 397, the existence of conditions justifying the making of winding up order on the ground that it is just and equitable that the company should be wound up, is a condition precedent to the interference by the Company Law Board. On the other hand, under section 398, the C.L.B. would interfere on its being satisfied that by reason of any material changes in the management or control of the company, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company. The two positions are distinct. Whereas in the first case, the C.L.B. acts to prevent injustice being done to a member or members in his or their individual capacity, in the second case the C.L.B. acts in order to prevent injury being inflicted to the interest of the company as a whole.
The material change in the management or control contemplated in the preceding paragraph will be deemed to have taken place in any of the following circumstances, viz.:
(i) when there has been alteration in the Board of directors;
(ii) when a replacement of its manager has taken place;
(iii) when a change has occurred in the ownership of the shares of the company;
(iv) when there has been a change in the membership of a company having no share capital;
(v) when a change has taken place in any other manner whatsoever .
By reason of any of the aforesaid changes, the affairs of the company are likely to be conducted in manner prejudicial to public interest or to the interest of the company [section 398(1)(b)].
Thus on an application made in the foregoing circumstances, the Company Law Board will interfere only if it is of the opinion:
(1) When it is made under section 397: (a) that the company‟s affairs are being conducted in a manner oppressive to any member or members [section 397(2)] or in a manner prejudicial to public interest; and (b) that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on “just and equitable” ground.
(2) When it is made under section 398:
(a) that affairs of the company are being conducted in a manner prejudicial to the public interests or in the manner prejudicial to the interests of the company [section 398(1)(a)]; or
(b) that a material change has taken place in the management or control of the company and as a consequence the affairs of the company may be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company [section 398(1)(b)].
The Company Law Board may make such order it thinks fit with a view to bringing to an end, or preventing the matters complained or apprehended, as the case may be.
(3) Under section 397, the Company Law Board can end the oppression complained of whereas, under section 398, it can prevent the matters complained of or apprehended. In other words, only section 398 is preventive; section 397 is not.
A complaint under section 399 can be made only by a member or members and not by officers or directors who might be oppressed in these capacities [Elder vs. Elder & Weston Ltd. (1952) 102 Law J. 91; (1952) S.C. 49].
In the aforementioned case, the interpretation of section 210 of the English Companies Act, 1948, corresponding to section 397 of our Act, was considered. There it was alleged that the majority of the shareholders of a private company had removed two minority shareholders from their directorship and employment but there was no suggestion of mismanagement to the detriment of the share holders. The Court held that these allegations could not support an application under the Section, which required oppressive conduct to members in their character as members. Such conduct towards a member in any other capacity, e.g., as a director or creditor could not perse justify an application. The “conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company, is entitled to rely” (ibid) (per Lord Cooper).