The Equitable saga has been long-running and controversial
The High Court has approved the government's plan for limited payments to those who lost money in the Equitable Life pension company.
Last year, the Parliamentary Ombudsman called for a full compensation scheme for over one million Equitable members.
The government's rejection of that idea was challenged in a judicial review.
But campaigners who launched the action say the court's ruling means the government's scheme will now have to cover more people than first planned.
The judicial review was brought by the Equitable Members Action Group (Emag).
It challenged the refusal of the government to accept all the findings and recommendations of the Ombudsman's report into the role of government departments in the Equitable Life collapse, published last year.
The Ombudsman, Ann Abraham, found ten examples of maladministration which she said had contributed to the devastating losses suffered by pension savers with the Equitable after the society was forced to close in 2000.
Instead of a full compensation scheme, the government this year asked a former High Court judge, Sir John Chadwick, to devise a partial "ex-gratia" scheme for those who had suffered the most.
Most of the government's reasons for doing so were upheld by the two High Court judges hearing the judicial review.
However, they also supported some of the claims put forward by Emag, that the government had been wrong not to accept more of the Ombudsman's findings.
The judges said the government's reasons for not doing so had not been "cogent".
Paul Braithwaite of Emag said as a result of this, the scope of the compensation of the eventual "ex-gratia" scheme being devised by Sir John Chadwick would now be much wider.
"The effect of today's ruling is to roll back eligibility to the date originally proposed by the Parliamentary Ombudsman," he said.
"If Emag's members had not paid for this legal action, there's little doubt that, despite the Parliamentary Ombudsman's recommendations for substantial compensation, the Government would have got away with limiting payments to a small number of Equitable's victims for losses post-1999," he added.
In the High Court hearings, Emag argued that the government had unduly restricted the scope of Sir John Chadwick's forthcoming scheme.
EQUITABLE: KEY EVENTS
January 1999: Equitable tries to abandon a guaranteed payment it can no longer afford
July 2000: The House of Lords says Equitable must honour its original commitments, forcing the company to put itself up for sale
December 2000: Equitable Life closes to new business after failing to find a buyer
March 2004: Lord Penrose's report says the society was the "author of its own misfortune"
July 2008: The Parliamentary Ombudsman says regulators failed to protect policyholders and calls for a compensation fund
The government's terms of reference had told him he could only consider recommending payments where the government agreed there had been maladministration and injustice.
However, the Treasury barrister, Clive Lewis QC, told the court that it was not seeking to restrict the eventual compensation scheme in this way.
The High Court judges said: "We take this as sufficient indication to Sir John that his remit is not as limited as he at first considered, and that he can look behind the government's "observations" and form his own view of their merits."
The overall ruling was welcomed by the Parliamentary Ombudsman, Ann Abraham.
"The government's response to my report was deeply disappointing, providing insufficient support for the rejection of many of my findings of maladministration on the part of the regulators and my conclusions that injustice resulted from those failings," she said.
"The court has now found that the government's response was in large part unlawful, not being supported by cogent reasons for rejecting my findings," she added.
The government wants to pay money only to those who lost most money in the Equitable saga, and only in proportion to the damage caused by the failings that the government acknowledges.
These points were accepted by the judges as "not irrational", so they upheld the validity of the proposed Chadwick scheme.
But they rejected the government's argument that it was established policy not to pay compensation to victims of failed official regulation.
"We say at once that we found no evidentiary support, at least in the material before us, for the claim that Parliament 'has accepted' that compensation for regulatory failure is 'not generally appropriate'," the judges said.
The government has 21 days to respond to the High Court ruling and to decide if it wants to appeal.