I got this message in vnc when I ran virtual machine of ubuntu 12.04 with the 
default kernel 2.6.32-41-server then with the updated kernel 3.2.0-24-generic 
but error still persist.
I can login to the vm  may be because --no-logs option in the /boot/grub.cfg.
output of the kernel ring buffer

[  124.901316] init: Failed to create pty - disabling logging for job
[  124.901937] init: Temporary process spawn error: No such file or directory
[  124.906374] init: Failed to create pty - disabling logging for job
[  124.906962] init: Temporary process spawn error: No such file or directory

regards 
-sagar

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https://bugs.launchpad.net/bugs/980917

Title:
  Failed to create pty - disabling logging for job

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