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A man walks past a company sign at a Nortel Networks office tower in Toronto on Feb. 25, 2009. Former Canadian technology giant Nortel Networks Corp. has auctioned off all its remaining patents to a consortium of software companies for US$4.5 billion.NATHAN DENETTE/The Canadian Press

Judges overseeing the Nortel Networks Ltd. bankruptcy trial have agreed to hear arguments on how interest should be paid on the company's $4.1-billion (U.S.) of outstanding bonds after the Canadian division said the question has become a stumbling block to reaching a voluntary settlement in the long-running dispute.

Nortel's Canadian bankruptcy monitor, Ernst & Young Inc., asked judges presiding over a trial to determine the division of Nortel's assets to also hold a hearing to decide on the method that should be used to calculate interest on the bonds.

Under the most generous interest calculation favoured by U.S. bondholders, interest accruing on the bonds since Nortel filed for bankruptcy protection in 2009 has hit $1.6-billion and is rising by $1-million a day.

However, other creditors have argued the courts should use a far more modest fixed U.S. federal judgment rate, which would cap interest payments at just $90-million.

The monitor said it is impossible to negotiate a settlement agreement until the interest issue is decided. "The monitor is therefore of the view that greater clarity around the [interest claim] at this time would assist in breaking the logjam," the court document states.

The court filing provides a rare public admission that the fiercely disputed bankruptcy case has the potential to be settled. However, documents filed by several parties involved in the bankruptcy give the impression confidential settlement talks have not been highly successful, and it is unclear how advanced any discussions have gotten.

A filing by the Canadian creditors committee, which supported hearing the motion on interest payments, said a decision could help pensioners and former employees get their money more quickly without waiting for a long court process to unfold. "One hopes that it will also have the salutary effect of invigorating settlement discussions that have thus far been fruitless," the Canadian creditors said.

Nortel's U.S. division and its bondholders objected to holding a hearing and said it is premature to decide the interest issue until the judges have first ruled how much money will be allocated to each division. That decision will determine whether there is enough money available in the U.S. to even consider paying interest on the bonds.

"Absent such determination, the interest issues are not ripe," the U.S. group said.

However, judges presiding over the unprecedented cross-border hearing – which is being heard simultaneously by judges in both Toronto and Wilmington, Del., using video links – said Tuesday they will hear arguments on the issue. A hearing is set for July 11, and all parties have until July 8 to submit written briefs.

Judges are wrapping up hearing evidence this week in a trial that began May 12 to determine how to divide $7.3-billion raised from the sale of Nortel's assets among the Canadian parent and its subsidiaries in Britain and the U.S.

The U.S. division said a decision on interest would not hasten settlement talks, and further contends that the monitor's court filing is "an improper violation of the confidentiality of settlement discussions and simply wrong."

"A rushed attempt to rule on this issue in a vacuum now will not promote settlement but instead risks creating new litigation fronts, with multiple appeals and further entrenchment of the parties' positions," the U.S. creditors said.

The importance of the interest calculation has been flagged before in the case.

A small group of bondholders whose notes are guaranteed by the Canadian parent company filed a court motion last November urging the judges to decide then on the interest calculation method.

They said at the time that a decision to cap interest at a low level would spur settlement talks and even avoid the need for a costly trial this year because U.S. bondholders would conclude there was no point in fighting in court for extra funds if the interest issue were off the table.

At the time, however, the motion did not win wide support from other groups involved in the bankruptcy, and the judges set it aside, saying it was premature to rule on the issue.

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