Nov. 12 (Bloomberg) -- Nortel Networks Corp. won court approval to have JPMorgan Chase & Co. hold proceeds from the sales of its telecommunications units after regulators warned that the money may not be available for Canadian creditors.

Ontario Superior Court Judge Herman Wilton-Siegel today approved the request by Nortel, which is selling businesses after filing for bankruptcy protection in Canada and the U.S. in January. The Toronto-based company is set to receive about $1.13 billion tomorrow when it completes the sale of a wireless- equipment unit to Ericsson AB.

“Canadian assets are leaving this jurisdiction,” Lily Harmer, a lawyer for the Office of the Superintendent of Financial Institutions Canada, told Wilton-Siegel at a hearing in Toronto. “This Canadian court may have little or no say as to what happens to those funds.”

The money will be held in escrow by New York-based JPMorgan until Nortel units in Canada, the U.S., U.K., Middle East and Africa agree with creditors on how the proceeds should be divided, Nortel lawyer Derrick Tay said. Nortel said in its Chapter 11 filing that it has more than 25,000 creditors and expects to make a distribution to holders of unsecured claims.

“We’ve been talking for months and still don’t have the allocation protocol,” Tay said. Most of Nortel’s sales come from outside Canada, while most of its costs are incurred in Canada, home to its corporate offices and research sites.

The Canadian regulators’ concerns are “a bit of an overstatement,” Tay said, because the allocation protocol will have to be approved by a Canadian judge.

Harmer said Canadian banks should hold a proportional share of proceeds from the asset sales. Avaya Inc. on Sept. 14 agreed to pay $915 million for Nortel’s phone-equipment unit and Nortel won court approval on Oct. 16 for a plan to sell its optical- networking business at an auction with Ciena Corp.’s $530 million offer as the starting bid.

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: November 12, 2009 12:59 EST