A damning interim report found problems with Liverpool City Council's recruitment processes, procurement irregularities and allegations of a toxic work environment.
The council is located in Sydney's southwest and is one of the largest and fastest-growing areas in the city.
An investigation conducted in May and June received 36 complaints about council conduct as well as concerned correspondence from councillors and a member of parliament.
After an interim report was published on July 11, the state government ordered a public inquiry under commissioner Ross Glover.
It also flagged an intention to place the entire council under the hands of an independent administrator.
NSW Local Government Minister Ron Hoenig did not show bias in releasing the report, a judge says. (Bianca De Marchi/AAP PHOTOS)
A challenge to moves suspending the council and postponing elections was mostly rejected by the Land and Environment Court on Monday afternoon.
Justice John Robson found the interim report had been published without procedural fairness to the council because it had been released without giving anyone named within a chance to respond.
This was admitted by the government which said the report had been removed around the time the lawsuit was filed and an apology sent to those identified in the document.
The judge rejected claims NSW Minister for Local Government Ron Hoenig or deputy secretary of the Office of Local Government Brett Whitworth showed actual or apprehended bias in releasing the report.
"The publication of the interim report was not an act of partiality," he wrote.
The use of the incomplete report was reasonable, even if it was legally invalid, Justice Robson said, because it still raised relevant matters relating to the maladministration of the council.
He dismissed the majority of the case and ordered submissions on costs.
Liverpool City Council can appeal the decision.
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