Boy A left a trail of havoc costing £30,000 by burglaries and joyriding - one third of which was after he was placed in a council care home in Selby, the court heard.
On January 11 this year he was sentenced by Magistrates at Selby Youth Court to 12 months youth custody after admitting 27 offences - mostly burglaries and car crimes - and asking for a further 15 to be taken into consideration.
Boy B, who joined Boy A in a string of burglaries while in council care in Selby, was sentenced to nine months custody by the same court. The Magistrates ruled that North Yorkshire County Council, in whose care the boys were remanded after earlier offences, was fulfilling the role of parent and was thus liable to pick up part of the compensation bill.
Mr Justice Laws said the central issue was whether the local authority was in the same position as the boys' parent or guardian.
He told the court: 'During the period of time from when these boys were remanded on October 30 to November 18, 1992 they absconded and committed a large number of offences. Compensation claims by victims were very large. In the case of Boy A it was £10,000. Both pleaded guilty in court on January 11 this year and had a number of other offences taken into consideration. The power to order local authorities to pay for compensation only arises if they have parental responsibility.
'The magistrates told the local authority they had parental responsibility for these two youths by virtue of the fact that they were in local authority accommodation. The magistrates fell into error. I allow this appeal and order that the compensation order be discharged. Outside court, solicitor for North Yorkshire CC, Mr George Eddin, said the appeal was an important test case which, if it were allowed to stand, could have unleashed a flood of similar compensation orders on local authorities.
Mr McCarthy added: 'If you have young hooligans going out committing offences, if you don't have parental responsibility there is not much you can do.'