diff --git a/e2e/tests/stable/chainsaw-test.yaml b/e2e/tests/stable/chainsaw-test.yaml
index 527e6d84..57381ab0 100755
--- a/e2e/tests/stable/chainsaw-test.yaml
+++ b/e2e/tests/stable/chainsaw-test.yaml
@@ -851,6 +851,264 @@ spec:
           metadata:
             name: avoid-localstack-c-bucket
 
+  # The following steps replicate an edge case scenario described here:
+  # https://github.com/crossplane/crossplane/issues/3037#issuecomment-1110142427
+  #
+  # 1. Make all Localstack backends unreachable.
+  # 2. Create edge-case-bucket and wait for failure.
+  # 3. Update edge-case-bucket, removing its create-failed annotation.
+  # 4. Make all Localstack backends reachable again.
+  # 5. Restart Provider Ceph deployment.
+  # 6. Bucket edge-case-bucket should become Ready and Synced.
+  - name: Make localstack-a unreachable and therefore Unhealthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-a
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"not-exists"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-a
+          status:
+            conditions:
+            - reason: HealthCheckFail
+              status: "False"
+              type: Ready
+
+  - name: Make localstack-b unreachable and therefore Unhealthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-b
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"not-exists"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-b
+          status:
+            conditions:
+            - reason: HealthCheckFail
+              status: "False"
+              type: Ready
+
+  - name: Make localstack-c unreachable and therefore Unhealthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-c
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"not-exists"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-c
+          status:
+            conditions:
+            - reason: HealthCheckFail
+              status: "False"
+              type: Ready
+
+  - name: Apply edge-case-bucket.
+    try:
+    - apply:
+        resource:
+          apiVersion: provider-ceph.ceph.crossplane.io/v1alpha1
+          kind: Bucket
+          metadata:
+            name: edge-case-bucket
+            labels:
+              provider-ceph.crossplane.io/validation-required: "true"
+          spec:
+            autoPause: true
+            forProvider: {}
+
+    # Assert edge-case-bucket has failed.
+    - assert:
+        resource:
+          apiVersion: provider-ceph.ceph.crossplane.io/v1alpha1
+          kind: Bucket
+          metadata:
+            name: edge-case-bucket
+          status:
+            conditions:
+            - reason: Creating
+              status: "False"
+              type: Ready
+            - reason: ReconcileError
+              status: "False"
+              type: Synced
+
+  - name: Remove creation-failed annotation from edge-case-bucket.
+    try:
+    - command:
+        args:
+        - patch
+        - bucket
+        - edge-case-bucket
+        - --type=json
+        - -p
+        - '[{"op": "remove", "path": "/metadata/annotations/crossplane.io~1external-create-failed"}]'
+        entrypoint: kubectl
+
+
+  - name: Make localstack-a reachable again and therefore Healthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-a
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"localstack-a"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-a
+          status:
+            conditions:
+            - reason: HealthCheckSuccess
+              status: "True"
+              type: Ready
+
+  - name: Make localstack-b reachable again and therefore Healthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-b
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"localstack-b"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-b
+          status:
+            conditions:
+            - reason: HealthCheckSuccess
+              status: "True"
+              type: Ready
+
+  - name: Make localstack-c reachable again and therefore Healthy.
+    try:
+    - command:
+        args:
+        - patch
+        - service
+        - localstack-c
+        - -n
+        - crossplane-system
+        - --type=merge
+        - -p
+        - '{"spec":{"selector":{"io.kompose.service":"localstack-c"}}}'
+        entrypoint: kubectl
+    - assert:
+        resource:
+          apiVersion: ceph.crossplane.io/v1alpha1
+          kind: ProviderConfig
+          metadata:
+            name: localstack-c
+          status:
+            conditions:
+            - reason: HealthCheckSuccess
+              status: "True"
+              type: Ready
+
+  - name: Scale Provider Ceph deployment to zero in order to restart.
+    try:
+    - command:
+        args:
+        - scale
+        - -n
+        - crossplane-system
+        - deploy/provider-ceph-provider-cep
+        - --replicas=0
+        entrypoint: kubectl
+
+  - name: Assert edge-case-bucket is created successfully.
+    try:
+    # Assert edge-case-bucket has been created successfully.
+    - assert:
+        resource:
+          apiVersion: provider-ceph.ceph.crossplane.io/v1alpha1
+          kind: Bucket
+          metadata:
+            name: edge-case-bucket
+          status:
+            conditions:
+            - reason: Available
+              status: "True"
+              type: Ready
+            - reason: ReconcileSuccess
+              status: "True"
+              type: Synced
+
+  - name: Delete edge-case-bucket.
+    try:
+    - command:
+      # We need to "unpause" edge-case-bucket to allow deletion.
+        args:
+        - patch
+        - --type=merge
+        - buckets
+        - edge-case-bucket
+        - -p
+        - '{"metadata":{"labels":{"crossplane.io/paused":"false"}}}'
+        entrypoint: kubectl
+    - command:
+        args:
+        - delete
+        - bucket
+        - edge-case-bucket
+        entrypoint: kubectl
+    - error:
+        resource:
+          apiVersion: provider-ceph.ceph.crossplane.io/v1alpha1
+          kind: Bucket
+          metadata:
+            name: edge-case-bucket
+  # End of edge case test scenario.
+
+  # Clean up ProviderConfigs.
   - name: Delete all ProviderConfigs.
     try:
     - command:
diff --git a/internal/controller/bucket/create.go b/internal/controller/bucket/create.go
index f1ef5a2a..5196a889 100644
--- a/internal/controller/bucket/create.go
+++ b/internal/controller/bucket/create.go
@@ -35,6 +35,48 @@ func (c *external) Create(ctx context.Context, mg resource.Managed) (managed.Ext
 		return managed.ExternalCreation{}, err
 	}
 
+	// Just before Crossplane's over-arching Reconcile function calls external.Create, it
+	// updates the MR with the create-pending annotation. After external.Create is finished,
+	// the create-success or create-failure annotaion is then added to the MR by the Reconciler
+	// depending on the result of external.Create (this function).
+	// In the event that an "incomplete creation" occurs (ie the create-pending annotaion is the
+	// most recent annotation to be applied out of create-pending, create-failed and create-succeeded)
+	// then the MR will not be re-queued. This is to protect against the possibility of "leaked
+	// resources" (ie resources which have been created by the provider but are no longer under
+	// the provider's control). This must all happen sequentially in a single Reconcile loop.
+	// See this Github issue and comment for more context on what is a known issue:
+	// https://github.com/crossplane/crossplane/issues/3037#issuecomment-1110142427
+	//
+	// This approach leaves the possibility for the following scenario:
+	// 1. The create-pending annotaion is applied to an MR by Crossplane and external.Create is called.
+	// 2. The provider pod crashes before it gets a chance to perform its external.Create function.
+	// 3. As a consequence, the resulting create-succeeded or create-failed annotations are never added to
+	// the MR.
+	// 4. The provider pod comes back online and the MR is automatically reconciled by Crossplane.
+	// 5. Crossplane interprets the MR annotaions and believes that an incomplete creation has
+	// occurred and therefore does not perform any action on the MR.
+	// 6. The MR is effectively paused, awaiting human intervention.
+	//
+	// To counteract this, we attempt to remove the create-pending annotation as immediately after it
+	// has been applied by Crossplane. It is safe for us to do this because the resources we are creating
+	// (S3 buckets) have deterministic names. This function will only create a bucket of the given
+	// name and will do so idempotently, therefore we are never in danger of creating a cascading
+	// number of buckets due to previous failures.
+	// Of course, this approach does not completely remove the possibility of us finding ourselves in
+	// the above scenario. It only mitigates it. As long as Crossplane persists with its existing logic
+	// then we can only make a "best-effort" to avoid it.
+	if err := c.updateBucketCR(ctx, bucket, func(_, bucketLatest *v1alpha1.Bucket) UpdateRequired {
+		meta.RemoveAnnotations(bucket, meta.AnnotationKeyExternalCreatePending)
+
+		return NeedsObjectUpdate
+	}); err != nil {
+		c.log.Info("Failed to remove pending annotation", consts.KeyBucketName, bucket.Name)
+		err = errors.Wrap(err, errUpdateBucketCR)
+		traces.SetAndRecordError(span, err)
+
+		return managed.ExternalCreation{}, err
+	}
+
 	span.SetAttributes(attribute.String(consts.KeyBucketName, bucket.Name))
 
 	ctx, cancel := context.WithTimeout(ctx, c.operationTimeout)
@@ -171,15 +213,9 @@ func (c *external) waitForCreationAndUpdateBucketCR(ctx context.Context, bucket
 		select {
 		case <-ctx.Done():
 			c.log.Info("Context timeout waiting for bucket creation", consts.KeyBucketName, bucket.Name)
-
-			return managed.ExternalCreation{}, ctx.Err()
+			createErr = ctx.Err()
 		case beName := <-readyChan:
 			err := c.updateBucketCR(ctx, bucket, func(_, bucketLatest *v1alpha1.Bucket) UpdateRequired {
-				// Remove the annotation, because Crossplane is not always able to do it.
-				// This workaround doesn't eliminates the problem, if this update fails,
-				// Crossplane skips object forever.
-				delete(bucketLatest.ObjectMeta.Annotations, meta.AnnotationKeyExternalCreatePending)
-
 				setAllBackendLabels(bucketLatest, providerNames)
 
 				return NeedsObjectUpdate
diff --git a/internal/controller/bucket/create_test.go b/internal/controller/bucket/create_test.go
index 4442d344..09cc971e 100644
--- a/internal/controller/bucket/create_test.go
+++ b/internal/controller/bucket/create_test.go
@@ -50,7 +50,11 @@ func TestCreateBasicErrors(t *testing.T) {
 				backendStore: backendstore.NewBackendStore(),
 			},
 			args: args{
-				mg: &v1alpha1.Bucket{},
+				mg: &v1alpha1.Bucket{
+					ObjectMeta: metav1.ObjectMeta{
+						Name: "bucket",
+					},
+				},
 			},
 			want: want{
 				err: errors.New(errNoS3BackendsStored),
@@ -67,6 +71,9 @@ func TestCreateBasicErrors(t *testing.T) {
 			},
 			args: args{
 				mg: &v1alpha1.Bucket{
+					ObjectMeta: metav1.ObjectMeta{
+						Name: "bucket",
+					},
 					Spec: v1alpha1.BucketSpec{
 						Providers: []string{"s3-backend-1"},
 					},
@@ -81,7 +88,11 @@ func TestCreateBasicErrors(t *testing.T) {
 				backendStore: backendstore.NewBackendStore(),
 			},
 			args: args{
-				mg: &v1alpha1.Bucket{},
+				mg: &v1alpha1.Bucket{
+					ObjectMeta: metav1.ObjectMeta{
+						Name: "bucket",
+					},
+				},
 			},
 			want: want{
 				err: errors.New(errNoS3BackendsStored),
@@ -93,8 +104,16 @@ func TestCreateBasicErrors(t *testing.T) {
 
 		t.Run(name, func(t *testing.T) {
 			t.Parallel()
+			s := runtime.NewScheme()
+			s.AddKnownTypes(v1alpha1.SchemeGroupVersion, &v1alpha1.Bucket{}, &v1alpha1.BucketList{})
+
+			cl := fake.NewClientBuilder().
+				WithScheme(s).
+				WithObjects(tc.args.mg).
+				WithStatusSubresource(tc.args.mg)
 
 			e := external{
+				kubeClient:   cl.Build(),
 				backendStore: tc.fields.backendStore,
 				log:          logging.NewNopLogger(),
 			}