A ruling by the court of appeal yesterday has opened the way for scores of the most dangerous prisoners in custody to claim the right to be released and five-figure compensation from the Home Office.

Only a stay granted by the judges, for the home secretary to appeal to the House of Lords, has stopped more than 100 inmates being freed immediately.

Three appeal judges, Lords Justices Longmore, Scott Baker and Hughes, allowed an appeal by an arsonist serving 10 years who said he was entitled to unconditional release after three-quarters of his sentence and could not be returned to jail. If the House of Lords upholds the appeal court's decision, Paul Stellato, 35, jailed for offences including arson with intent to endanger life, will be able to claim damages estimated at about ?25,000 for being unlawfully held for nearly a year after his sentence should have ended. Lawyers estimate there could be more than a hundred other prisoners in the same position.

Phillippa Kaufmann, representing Stellato, successfully applied for conditional bail for her client when the judges imposed the stay. She told them that any other prisoner in the same position would be able to apply for habeas corpus immediately, quoting the judges' ruling that their imprisonment was unlawful.
Parishil Patel, representing the home secretary, immediately applied for a stay when the judges ruled that prisoners such as Stellato were being held unlawfully and were entitled to immediate release. He told the judges: "We are talking about people who are the most dangerous in the system ... The total might be small, but it is not as small as your lordships think."

The appeal court ruled that prisoners jailed before 1998 are subject to the conditions of the 1991 Criminal Justice Act, under which prisoners are released after three-quarters of their sentence but are not subject to a licence and therefore cannot be summoned back to jail.

A Prison Service spokeswoman said: "The court has ordered the release of this individual. Obviously we will comply with this order but since we disagree with this judgment, the home secretary has instructed that we appeal against it to the House of Lords."

Stellato was released from custody in February 2005 at the two-thirds point of his sentence. But on the same day he was recalled for breach of his licence, released again in June 2005, and then in August his licence was again revoked.

Lord Justice Scott Baker said Stellato should have been released unconditionally as he was entitled to be under the 1991 legislation. He was not subject to any licence and could not therefore have been in breach of it. The Home Office argued that changes to sentencing brought in by the Criminal Justice Act 2003 applied to Stellato, but the judge said there was no obvious reason why parliament would have sought to disadvantage this group of prisoners when that was enacted.

David Davis, the shadow home secretary, said: "Yet again we see the consequences of hasty and ill-thought-out legislation which the government has got wrong."