The Office for the Supervision of Solicitors (OSS) has dropped a £31,000 claim against a corrupt solicitor after conceding that he should have been struck off earlier.
It is claimed that the move could open the floodgates to a string of similar climb-downs.
The Law Society had claimed £61,000 in the bankruptcy of James Peasegood a solicitor struck off in September 1988 for misuse of client funds. The sum was made up of £30,000 for the cost of intervention in his practice and £31,000 for payments made to his former clients from the Solicitors Compensation Fund.
But in a letter to Peasegood's ex-wife Hannah Peasegood, who has been resisting the claim, OSS director Peter Ross said the Law Society was voluntarily dropping the second half of it.
Ross admitted that the OSS's predecessor, the Solicitors Complaints Bureau (SCB), should not have granted Peasegood a practising certificate in February 1988 after he failed to file an accountant's report and that it should have subsequently inspected his accounts.
He wrote: "A moral argument exists that the SCB, by its own actions, contributed to circumstances whereby it became necessary to make these payments."
Ms Peasegood said that before the Law Society tightened up procedures in 1991 for the issuing of practising certificates, large numbers of solicitors carried on practising without certificates. She suggested there may have been several other cases like that of her husband when certificates were issued when they should not have been.
But a spokeswoman for the Law Society said the case was a one-off and had no "global significance".