I tested your scenario with Ubuntu version 12.04 and could not reproduce
the described behavior.

I successfully connected with PPP chap authentication to the publicly
available VPN www.britishtvanywhere.com.

Here is the corresponding log:
May 22 08:06:47.885 Starting xl2tpd: xl2tpd.
May 22 08:06:48.932 xl2tpd[6481]: Connecting to host vpn9.usaip.eu, port 1701
May 22 08:06:48.977 xl2tpd[6481]: Connection established to 78.129.227.67, 
1701.  Local: 1894, Remote: 36315 (ref=0/0).
May 22 08:06:48.978 xl2tpd[6481]: Calling on tunnel 1894
May 22 08:06:49.020 xl2tpd[6481]: Call established with 78.129.227.67, Local: 
2528, Remote: 1, Serial: 1 (ref=0/0)
May 22 08:06:49.022 xl2tpd[6481]: start_pppd: I'm running: 
May 22 08:06:49.022 xl2tpd[6481]: "/usr/sbin/pppd" 
May 22 08:06:49.022 xl2tpd[6481]: "passive" 
May 22 08:06:49.023 xl2tpd[6481]: "nodetach" 
May 22 08:06:49.023 xl2tpd[6481]: ":" 
May 22 08:06:49.023 xl2tpd[6481]: "file" 
May 22 08:06:49.023 xl2tpd[6481]: 
"/etc/ppp/www.britishtvanywhere.com.options.xl2tpd" 
May 22 08:06:49.024 xl2tpd[6481]: "ipparam" 
May 22 08:06:49.024 xl2tpd[6481]: "78.129.227.67" 
May 22 08:06:49.024 xl2tpd[6481]: "/dev/pts/2" 
May 22 08:06:49.025 pppd[6482]: Plugin passprompt.so loaded.
May 22 08:06:49.025 pppd[6482]: pppd 2.4.5 started by root, uid 0
May 22 08:06:49.029 pppd[6482]: Using interface ppp0
May 22 08:06:49.029 pppd[6482]: Connect: ppp0 <--> /dev/pts/2
May 22 08:06:49.800 pppd[6482]: CHAP authentication succeeded
May 22 08:06:50.891 pppd[6482]: local  IP address 172.31.156.45
May 22 08:06:50.892 pppd[6482]: remote IP address 172.31.156.0


I did not have a  /etc/ppp/chap-secrets file, the password was delivered, as 
expected, by the VPN client via passprompt.so

To further investigate the issue could you please manually enable PPP
debugging by uncommenting the debug line in file
/etc/ppp/MyVPN.options.xl2tpd and attach the then resulting log ?

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https://bugs.launchpad.net/bugs/999476

Title:
  Chap authentication fails?

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