Sir Jon Shortridge, Wales's top civil servant, said legal advice had been taken at the top level to sack Steve Martin after problems involving irregular payments to 18 training projects.
At the centre of the row was the pound;4 million grant to the pound;14m Pop Factory project in Rhondda for interactive video modules intended to deliver training to disaffected youngsters. The scheme has been described as "highly innovative" and Elwa will decide next month whether it should be reactivated.
But Sir Jon told Assembly members of the audit committee examining the Auditor General for Wales's report into Elwa's financial management of its innovation and development projects that he had been advised that he could lose the case if Mr Martin sued for unfair dismissal.
Sir Jon said, "There was not any impropriety; it was a failure of management." Negligence of duty could be a possible reason for action. But Mr Martin had already been disciplined for the events prior to June last year, and Sir Jon said he had since ensured there would be no repetition.
With the creation of an additional post, Mr Martin has been replaced as chief executive by Peter Higson, who was praised by Sir Jon for his emphasis on financial, management and training systems aimed at delivering traditional civil service values.
Mr Martin had complained that his orders were often ignored in his own office. The Pop Factory project, for instance, was highly advanced in its thinking, but was being delivered by a very small company.
When a check was done on the company's financial viability, staff had checked only on the subsidiary delivering the project; as this was a new company, no accounts had been filed. But no check was made on the parent company.
Mr Martin said he and chairman Enid Rowlands - who is not seeking reappointment, and did not attend the session - had "tried to do too much too quickly". For instance, the Pop Factory project had been rushed through to use an unexpected financial under-spend discovered towards the end of Elwa's first year.
Jane Davidson, Welsh education minister, escapes criticism in the report by Sir John Bourn, the auditor general for Wales. But Jocelyn Davies, Plaid Cymru AM, said that her involvement in signing off of the Pop Factory scheme was "unique" for an Elwa project. And Alun Cairns, Conservative, said he will seek to include in the committee's report criticism of her involvement in the decision-making process.