London Metropolitan University (LMU) has won the right to bring a judicial review over the dispute about visas for overseas students.
Mr Justice Irwin at the High Court said the university had an arguable case relating to the UK Border Agency's (UKBA) decision to revoke its licence to sponsor students from outside the European Economic Area.
But he refused to grant an injunction restoring the position "pro tem" - by suspending the revocation pending the outcome of the review - as the balance of convenience favoured the matter being resolved one way or another before fresh students were invited to commit themselves to study.
The judge did make temporary orders protecting the position of those students currently in the UK with full proper immigration status.
The university's counsel, Richard Gordon QC, said there was a strong prima facie case that the UKBA's decision was unlawful. He told the High Court: "The financial impact on the university, and on its reputation and good will, are enormous. The impact on students' education, financial position and the disruption to their lives is extremely significant."
The university's licence was cancelled at the end of August after the UKBA examined alleged failings.
Of 101 sample cases, 26 students were studying between last December and May even though they had no leave to remain in the UK, UKBA figures showed. A lack of required monitoring meant there was no proof that students were turning up to lectures in 142 of 250 (57%) sampled records. Twenty of 50 files checked since May for evidence of mandatory English language testing and academic qualifications showed poor assessment, where documents were either not verified or not held.
More than 2,000 students left in limbo will get three months to find an alternative course, officials have said. Genuine students have 60 days to make a new application or to arrange to leave the UK, but the countdown starts when UKBA writes to them and no letters will be sent out until October 1.
Lisa Giovannetti QC, for the Home Office, said that it could not be suggested that LMU was not made aware what the issues were - the obligations involved were clear throughout. It had been aware for "months and months" that its systems simply did not comply with sponsor requirements. It was not suggested that it had deliberately breached the regulations, and it had made attempts to put things right, but had been unable to do that effectively.
An LMU spokeswoman said: "This is the start of the legal process and not the actual judicial review. London Met is delighted to announce that the outcome of today's hearing is in favour of the university and it has received permission that the case be judicially reviewed." The spokeswoman said that discussions were ongoing between the parties involved in the case about the students referred to in the ruling. "The university hopes it will be able to reach agreement but if not the judge will hear further legal submissions later this afternoon and will then make an order that will, in his view, best protect these students," she said.