This research is concerned with the adaptive neural network observer based fault approximation and fault-tolerant control of time-varying nonlinear systems. A new strategy for adaptively updating the weights of neural network parameters is proposed to enhance fault detection accuracy. Lyapunov function theory (LFT) is applied for adaptively updating the learning parameters weights of multi-layer neural network (MLNN). The purpose of using adaptive learning rates to update the weight parameters of MLNN is to obtain the global minima for highly nonlinear functions without increasing the computational complexities and costs and increase the efficacy of fault detection. Results of the proposed adaptive MLNN observer are compared with conventional MLNN observer and high gain observer. The effects of various faults or failures are studied in detail. The proposed strategy shows more robustness to disturbances, uncertainties, and unmodelled system dynamics compared to the conventional neural network, high gain observer and other existing techniques in literature. Fault tolerant control (FTC) schemes are also proposed to account for the presence of various faults and failures. Separate sliding mode control (SMC) based FTC schemes are designed for each observer to ensure stability of the faulty system. The suggested strategy is validated on Boeing 747 100/200 aircraft. Results demonstrate the effectiveness of both the proposed adaptive MLNN observer and the FTC based on the proposed adaptive MLNN compared to the conventional MLNN, high gain observer and other existing schemes in literature. Comparison of the performance of all the strategies validates the superiority of the proposed strategy and shows that the FTC based on proposed adaptive MLNN strategy provides better robustness to various situations such as disturbances and uncertainties. It is concluded that the proposed strategy can be integrated into the aircraft for the purpose of fault diagnosis, fault isolation and FTC scheme for increasing the performance of the system.