Thanks for your bugreport.

I just talked to Scott about it and right now karmic is not supported
with upstart. I will add a check that ensures the upgrade is not
performed when running under a vserver.

** Also affects: update-manager (Ubuntu Karmic)
   Importance: Undecided
       Status: New

** Changed in: update-manager (Ubuntu Karmic)
       Status: New => Fix Committed

** Changed in: update-manager (Ubuntu Karmic)
   Importance: Undecided => Medium

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Setting up upstart within linux-vserver fails if telinit is not running
https://bugs.launchpad.net/bugs/454783
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