April 28 (Bloomberg) -- Nortel Networks Corp., the insolvent telephone-gear maker, won an extra three months to work out a plan that will allow the company to emerge from bankruptcy.

Ontario Superior Court Judge Geoffrey Morawetz today agreed to extend the order, which was due to expire May 1, to July 30, following a hearing in Toronto. The order protects the Toronto- based company from creditor demands and lawsuits.

Nortel filed for bankruptcy in January in the U.S. and Canada after losing almost $7 billion since 2005. Nortel has said it will fire at least 5,000 workers this year, about 15 percent of its staff, and is considering sales of some businesses to reorganize into a smaller company.

Nortel’s Canadian unit, where most of its research and development is done, is running out of cash because intercompany transfers from the U.S. have been frozen during the reorganization, the company’s lawyer Derrick Tay said at today’s hearing.

“Canada needs a resolution of this issue in a speedy manner,” Tay said. “It’s like burning Canadian furniture to keep creditors in other jurisdictions warm.”

U.S. creditors are concerned they would recover less money following a restructuring if cash is allowed to flow from the U.S. to Canada, Tay said. In a Chapter 11 petition in Delaware, U.S. operating unit Nortel Networks Inc. said it had assets of $11.6 billion and debt of $11.8 billion as of Sept. 30.

Nortel and the creditors reached a preliminary agreement that would allow the U.S. unit to send $157 million to Canada to fund operations there, Tay said. The agreement must be approved by judges in Ontario and Delaware.

A joint hearing on the issue, involving the Canadian and U.S. judges, is planned for the last week of May, Tay said.

The case is In the matter of a plan of compromise or arrangement of Nortel Networks Corp., 09-CL-7950, Ontario Superior Court of Justice (Toronto).

To contact the reporter responsible for this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.

Last Updated: April 28, 2009 13:12 EDT