The court challenge -- brought by the Human Rights Law Center (HRLC)
-- centred around the legality of the Australian government to detain people on foreign soil.
On Wednesday, the court ruled that the Australian government's role in funding and participating in offshore detention does not breach Australian law. It means that over 260 people who had been sent to Australia for medical care are likely to be sent back.
"We're disappointed with the ruling," said the HRLC's director of legal advocacy, Daniel Webb. "We now look to the Prime Minister to step in and let them stay."
More than 1,400 people are being held in immigration detention on the islands while they wait for their asylum claims to be processed. Some have been there for more than three years. The average length of detention, according to the latest government figures, is 445 days.
'The hardest phone call of my life'
The HRLC brought the case on behalf of 260 people -- mainly women and children -- who had been transported to Australia for medical care. The lead case is that of a Bangladeshi woman who was detained on Nauru, but brought to Australia during the latter stages of her pregnancy.
Wednesday's judgment legally entitles Immigration Minister Peter Dutton to move quickly in sending her, her child, and all other related cases back to Nauru.
According to UNICEF, the group includes women who have been sexually assaulted, 54 children and 37 babies who were born in Australia.
Webb said these people were now terrified they would face immediate deportation.
He told CNN that phoning the Bangladeshi mother to advise her of the ruling was one of the hardest calls he's ever had to make. He said she broke down in tears.
"The mother just wants what all mothers want -- her child to have a decent life somewhere safe," he said. "The legality is one thing, the morality is another. Ripping kids out of primary schools and sending them to be indefinitely warehoused on a tiny remote island is wrong."
The HRLC told CNN it would be "premature" to discuss any legal avenues they might explore, but the Bangladeshi mother still wanted to do everything she could to ensure her child had "the opportunity to experience freedom somewhere safe."
Australian Prime Minister Turnbull has been under immense pressure to allow child asylum seekers to stay in Australia, regardless of Wednesday's court ruling.
"It is unreasonable for the Australian Government to shift responsibility for this group of children and families with complex needs to a developing state," said UNICEF Australia.
"The Nauru Government... does not yet have the education, child protection, health or social welfare systems required to adequately support people with ongoing needs," the organization said in a statement on Wednesday.
Australia's controversial immigration policy, "Operation Sovereign Borders," was spearheaded by Turnbull's predecessor, Tony Abbott.
Boats of asylum seekers are intercepted at sea and sent for processing at either the Nauru camp, or one on Manus Island, in Papua New Guinea. If their claims are granted they are either settled in those countries or have the option of moving to Cambodia
Australia's government says that in implementing this divisive policy, they wanted to send a clear message to any potential refugees and people smugglers -- that asylum seekers will not be settled in Australia.
But the policy has faced criticism from human rights groups and the wider international community.
Critics have slammed conditions in the detention centers
. Current and former child detainees at the Nauru camp described it to CNN as a prison
The government however argues that the deterrent has worked.
"The Coalition Government has stopped the perilous flow of of people smuggling ventures. There has not been a successful people smuggling venture to Australia in the last year," an Australian government spokesperson said in a statement to CNN.
"Stopping the boats has enabled this Government to return integrity to Australia's humanitarian and refugee program."