Labour donor Michael Foster, a former parliamentary candidate, has brought the claim against the party’s general secretary Iain McNicol, who is being sued in a representative capacity, and Mr Corbyn.
His lawyers told Mr Justice Foskett at the High Court that the Labour Party’s rules were “misapplied” when its national executive committee (NEC) voted by a majority of 18 to 14 that Mr Corbyn should automatically go on the ballot paper without needing to obtain the backing of 20% of Labour MPs and MEPs - 51 nominations.
Gavin Millar QC told the judge - who will give his ruling on Thursday - that it was clear that the meaning given to the rules by the majority on the NEC on July 12 was wrong. It was not a “reasonable” interpretation.
If the judge decided in his favour and granted a declaration that Mr Corbyn must obtain the requisite level of support before his name could go forward, the party would be required to return to the nomination stage and go through it again.
“The claimant has no wish to deny the second defendant (Mr Corbyn) a fair opportunity, which can be achieved in this way, of obtaining the requisite number of nominations.”
Ballot papers will start to be sent out on August 22 with the result announced at a special conference in Liverpool on September 24.
Mark Henderson, counsel for Mr McNicol, said the rules were not ambiguous or open to serious doubt.
Potential challengers must attain a 20% threshold of support to enable them to stand against the incumbent leader but there was no basis for interpreting this provision as requiring the incumbent to also attain this threshold.
Martin Westgate QC, for Mr Corbyn, argued that the NEC’s conclusion was “plainly right”.
“In any case, the conclusion reached by the NEC is entitled to great respect and the court should not interfere with it.”
Mr McNicol announced a leadership election on July 11 but frontrunner Angela Eagle withdrew from the race, leaving Owen Smith to take on 67-year-old Mr Corbyn, who became leader in September last year.
Mr Smith said he believed Mr Corbyn should be on the ballot and urged the court not to interfere in Labour’s electoral process.
“I think Jeremy should be on the ballot. I have always though that and I thought it was the right decision by the NEC to put him on the ballot. I think the mood in the party will be really angry if a judge interfered and made sure that Jeremy wasn’t on the ballot,” the leadership challenger told the BBC.
“I’m hopeful and I’m confident that the judge will do the sensible thing and say ‘This is up to the Labour Party’.”
Mr Smith added: “We are a political party; judges shouldn’t be interfering in what we decide.”