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An Ontario Superior Court judge has granted Nortel Networks Corp. protection from its creditors under the Companies' Creditors Arrangement Act.

Shortly after noon Wednesday, Mr. Justice Geoffrey Morawetz told a court room of about 30 lawyers that he was approving Nortel's application for protection. No creditors voiced any objection to the company's filing.

Derrick Tay, an Ogilvy Renault LLP lawyer representing the company, said the bankruptcy filing was necessary because Nortel was quickly burning through its cash reserves.

Placing all the company's assets in Canada, Europe and the United States in court protection, Mr. Tay said, “allows the company in one comprehensive move to do all that is necessary for a full financial and operational restructuring.”

Nortel's U.S. subsidiary filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy code and it plans to file for protection in Europe in the near future.

Nortel's board of directors signed off on the decision to seek creditor protection at a meeting Tuesday night after sales began to slide and pressure from some key suppliers mounted.

The telecom-hardware manufacturer failed to conclude a deal to sell one of its divisions that was put up for sale in September, and had faced the prospect of paying $107-million (U.S.) of interest on its debts on Thursday.

Analysts have speculated that the company could now be broken up into pieces and sold at fireside prices. But in an interview, Mike Zafirovksi, Nortel's chief executive officer, said now that the company is protected from creditors, there is no longer a burning need to sell assets.

“A break-up is not a top priority for the business. On the contrary, it's to be able to come out the other side as a nimbler, more focused, successful technology company,” he said.

In a news release, Nortel said: “The company's normal day-to-day operations are expected to continue without interruption.”

However, some sources say the company has seen business dropping significantly as customers worry about its future, and analysts says Nortel can expect to lose significantly more business after the filing.

In addition, suppliers to the company must now decide whether to continue doing business with Nortel and under what conditions. More than $1-billion of outstanding receivables may never get paid if the company fails to emerge from bankruptcy protection.

Nortel's already threadbare shares plunged to just 9 cents apiece before heading back up to 13 cents on the Toronto Stock Exchange following the end of a trading halt Wednesday morning, down 25.5 cents or more than 66 per cent from Tuesday's close.

The New York Stock Exchange suspended Nortel just after the company filed.

Opting for creditor protection marks an incredible fall from grace for a telecom manufacturer that is almost as old as the telephone. Nortel easily qualified as the country's largest company at the peak of the tech boom in 2000, with a $366-billion (Canadian) market capitalization and 95,000 employees.

While still North America's largest telecom equipment maker, Nortel's shares were worth a total of just $192-million on Tuesday, and the company has 26,000 staff after a bruising series of layoffs over the past eight years. Nortel stock that soared to $1,231 at the peak of the tech bubble – reflecting a recent consolidation in shares – closed Tuesday at 38.5 cents on the Toronto Stock Exchange.

In Ottawa, Industry Minister Tony Clement said the Export Development Canada has agreed to provide up to $30-million in short-term financing through an existing bond facility.

Ontario Premier Dalton McGuinty said he remains hopeful that Nortel will ultimately experience a renaissance by possibly finding new opportunities as a smaller business.

“It's terrible news for the folks who work at Nortel,” Mr. McGuinty told reporters on Tuesday. “I think it's really important to acknowledge that there are other families and businesses that are really struggling, and that we are working as hard as we can to sail into a very strong headwind.”

Mr. McGuinty said he has no plans to call up company executives and offer them financial aid. In fact, his government rejected Nortel's request for a grant under the Ontario government's $1.15-billion Next Generation Jobs Fund, said a spokeswoman in his office.

“The fund is not designed to prop up companies in financial straits,” said Greg Crone, a spokesman for Economic Development Minister Michael Bryant.

Mr. Crone said Nortel executives approached government officials for funding last spring but as talks were under way, the company's situation became even more dire. As a result, the government rejected Nortel's application last fall, he said.

Karman Wong, a spokeswoman in Mr. McGuinty's office, said the government encouraged Nortel executives to work with the federal government, which is providing financial assistance for the company's application for bankruptcy protection.

News about Nortel's deepening woes overshadowed Mr. McGuinty's announcement at a manufacturing company in Mississauga. The Premier said Cyclone Manufacturing is receiving a $7.7-million grant under the same fund to which Nortel was denied access.

Cyclone, which makes parts for the aerospace industry, said the grant will support a $50-million investment the company plans to make to create another 133 jobs over five years.

Nortel's Mr. Zafirovski was parachuted into the top job in 2005 after successful stints at General Electric and Motorola. But he was never able to right a company plagued by a series of accounting scandals – one of his predecessors faces fraud charges – and weakening demand for its products.

With an estimated $1-billion in its coffers, Nortel has been burning though cash at an impressive clip, and has $4.5-billion (U.S.) in long-term debt. Major lenders include JPMorgan Chase, Citigroup and Royal Bank of Canada.

Seeking court protection gives the company more latitude in selling or restructuring factories and research facilities. Air Canada, for example, went this route in 2003, continuing to fly while cutting jobs and reworking its debts. Duncan Stewart, an analyst at DSAM Consulting in Toronto, said: “The issue is not whether or not they can pay it. … It's the idea of: If you know you're eventually going to default anyway, why not do it now and keep the … interest payments you would have shelled out?”

Typically, companies do not file for bankruptcy protection until they have drained most of their cash. But the deepening global credit crunch had raised concerns that a troubled company such as Nortel would not be able to raise enough money to finance its operations during bankruptcy proceedings.

The court filing will come as a shock to the company's bondholders, who had expected Nortel to pay its debts this week. Shareholders will likely see their holdings all but wiped out.

As a consequence of filing for protection, Nortel can expect to lose significantly more business, potentially sending the company into a death spiral, analysts say.

The sophisticated equipment made by Nortel carries an expectation from customers – the major phone companies – that the manufacturer will be around to service networks.

One of the reasons the auto makers gave last month for resisting calls for them to file for bankruptcy protection was that potential customers would not buy from a manufacturer they did not think would be around to service the vehicles. For the network equipment industry, that fear is justifiably magnified.

When Nortel said in September that it would put its Metro Ethernet Networks division up for sale – it makes hardware that carries Internet traffic – revenue fell on fears of sustainability and service.

Now Nortel faces the prospect of selling additional divisions to pay down debts, all under the supervision of a judge. In addition to selling the Ethernet unit, divisions that could go on the auction block include the carrier networks unit, which sells gear to phone companies, and the enterprise division that sells telecom equipment to businesses. Potential buyers for these units are all foreign: Nokia Siemens Networks, Telefon AB LM Ericsson, Cisco Systems Inc. and China's Huawei Technologies Co. Ltd.

Nortel's storied history in the telecommunications field dates back nearly as far as the telephone itself. The company was founded in 1895 as Northern Electric Manufacturing Company to begin selling telephone equipment to other companies as Canada built out its first telecom network.

Throughout the first half of the 20th century, the company's telecom gear business grew steadily, but Nortel also built telegraphic equipment used on the battlefields of the First World War as well as the first sound system in Canada for talking movies.

In the 1950s, the company developed electromechanical switches, a technology that would allow direct phone calls between cities. Nortel was an early pioneer of satellite technologies in the 1960s and helped build Canada's first cellular telephone networks.

Nortel's fortunes exploded with the dawn of the Internet and the introduction of increasingly sophisticated modems and cellular technologies. At its peak, this one company accounted for nearly one-third of the total value of the TSX; the company was worth more than all six big banks combined.

With files from Andrew Willis, Matthew Hartley, Karen Howlett and Reuters