The federal government has given an undertaking not to immediately try to hand over the asylum seekers to Sri Lankan authorities, as it did with a smaller group whose boat was also intercepted late last month.
The 153 asylum seekers set sail from India and doubts have arisen whether Sri Lanka would accept the asylum seekers back, even if the government wins the High Court case.
The High Court has been told an Australian vessel intercepted the asylum seeker boat just outside Australian territorial waters in the Indian Ocean.
The federal government argues that therefore they should not be processed under the Australian Migration Act.
But lawyers for the asylum seekers are arguing they should be processed under the Act and not immediately returned to Sri Lanka against their will.
Judge Susan Crennan has indicated the full bench of the High Court will likely hear the case, with a directions hearing expected within 21 days.
It's unclear whether the asylum seekers will stay aboard the Customs vessel for that time.
Prime Minister Tony Abbott has told Channel 9 they are safe, and he's defending his government's actions.
"What the Australian people elected us to do was to stop the boats. Let me stress again, Karl, if we stop the boats, we stop the boat deaths. If we stop the boats, we stop the budget blow-outs as well as stopping the massive inflow that we were receiving in the middle of last year. Let's not forget that in the middle of last year, Karl, we were having arrivals at the rate of almost 5,000 a month, at the rate of 50,000 a year. There's been a very, very dramatic change since then."
Judge Crennan has given lawyers for the asylum seekers seven days to file a statement of claim, after which the Government has seven days to respond.
The hearing has now been adjourned until Friday morning, when the Government's lawyers are expected to provide documents including details of the asylum seekers' names.
However, even if the court finds in the government's favour, their return could be complicated.
Sri Lanka's High Commissioner to Australia, Admiral Thisara Samarasinghe has told the ABC his country has no plans to accept the group.
"I can categorically deny and reject any plans of Sri Lanka to take over the suspected, speculated, presumed asylum- seekers coming from India.''
Human rights lawyer George Newhouse says the real question is what happens to the group now.
He says they can't be held at sea indefinitely.
"It's not just when the High Court will hear the case, it's what the Government wants to do with these people. And if it goes on too long, then we may need to approach the High Court again for urgent injunctions. As I said, we're not going to allow people to be held in a floating prison camp. The Government must make up its mind at some point what they're going to do with these individuals."
There are now reports the government has no intention of sending the asylum seekers to Sri Lanka.
Those now on board the -Customs boat could be transferred to the Manus Island detention centre in Papua New Guinea, the Nauru centre or sent back to India.
But a return to India could also be problematic, as they would have to prove they in fact were residents of India.
Liberal Democratic Party Senator David Leyonhjelm says the asylum seekers should be allowed to settle in Australia.
"Many of them would make good Australians. Tamils are great at fitting into Australia. They're industrious and get on with making their way in the country, become good Australians. So we're possibly missing out on some good people and I think it's a shame. I've said before our policy is to let them in but they should pay a fee and not have access to welfare."
The federal opposition says the current situation demonstrates what it calls the mess the government has made of its immigration policy.
Opposition leader Bill Shorten says a Labor government would be handling the situation better.
"We do believe in regional reprocessing. We do believe in deterring people smugglers. But I don't believe that anything that Labor stands for justifies Tony Abbott who is the Prime Minister washing his hands of the safety of people in the care of the Australian Government. That is not the Australian way to wash our hands of the safety of other people."
Meanwhile Immigration Minister Scott Morrison has flown to Sri Lanka to formally hand over two Bay Class patrol boats to the Sri Lankan Navy.
Australia provided the boats to help combat people-smuggling operations.
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