Commonwealth funding will be restored to a NSW Islamic school after the Federal Court ordered the government to no longer delay it over transparency concerns.
One of Australia's largest Islamic schools has won a legal fight to receive about $6.5 million in Commonwealth funding which had been withheld due to governance and transparency concerns.
The Malek Fahd Islamic School in NSW was in April notified its funding would be delayed and there were fears it would be forced to close ahead of term three, which begins on July 18.
The Federal Court of Australia on Thursday ruled the government must continue the month-by-month funding and back-pay it to April, representing a reprieve as the school also fights a separate case about its future.
Justice John Griffiths said the matter had "considerable urgency" about it, with obvious practical ramifications for more than 2300 students and 250 teachers across three campuses.
"Unless Commonwealth funding which is provided to the state and then passed through to the school is restored, the applicant will shortly go into administration," he said in the judgment.
Board chairman John Bennett called the decision "a great relief" after a difficult time for the community.
"It's been very anxious, very stressful for parents, for students and staff," Dr Bennett told AAP.
Justice Griffiths acknowledged the school's "troubled history" in recent years.
Part of the funding disagreement centred on whether the school was operating on a for-profit basis.
It was argued that public funds were at risk of being passed to the Australian Federation of Islamic Councils because of a current contractual obligation to pay non-commercial rent to AFIC.
Justice Griffiths rejected the submission and agreed with the school's explanation that it was "asset rich but cash poor".
Dr Bennett said many of the problems related to a previous board which was replaced in March last year.
Since then, it has been adjusting its governance and financial operations. AFIC no longer has representation on the board.
The school was "very, very close" to addressing the government's concerns, Dr Bennett said.
A separate case involves the government's February 2016 decision to revoke approval of the school's responsible authority, the result of which is still pending.
A Department of Education and Training spokesman on Thursday defended that decision and said the school had a responsibility to make sure it complied with legislation, including "unresolved issues involving past boards".
"The department considers that the authority for Malek Fahd Islamic School remains non-compliant with the Australian Education Act 2013," he said in a statement.