He made the admission in a letter seen by The Guardian and sent to lawyers acting for the family of British-Iranian national Nazanin Zaghari-Ratcliffe, who is serving a five-year sentence in Iran for espionage.
Wallace said London is seeking ways to pay off the debt to Tehran, which is estimated to be as much as £400 million arising from the non-delivery of tanks ordered by Iran's ousted monarch Mohammad Reza Shah.
International Military Services (IMS), a subsidiary of the British Ministry of Defense, signed contracts in 1971 to sell more than 1,750 Chieftain tanks and armored vehicles to Iran. The deals were cancelled after the Shah was deposed in the 1979 Islamic Revolution, but Iran had already paid for the undelivered tanks and demanded its money back.
An international arbitration in 2008 ruled the UK owed the debt, but it has not yet paid up.
“With regard to IMS Ltd and the outstanding legal dispute the government acknowledges there is a debt to be paid and continues to explore every legal avenue for the lawful discharge of that debt,” Wallace wrote.
“I have previously stated my personal position and I remain committed to its resolution, but it would not be appropriate for me to comment further at this time,” he added.
Before becoming defense secretary, Wallace had been sharply critical of the British government’s delay in settling its debt, describing it as “un-British, double-dealing and obfuscatory”.
Britain has repeatedly refrained from paying the debt, citing illegal sanctions imposed by the United States on Iran.