Well for quantal base images i had to add --addpkg linux-image-generic
during base image creation. This is based on the information given in
bug 1037607.

Just to make it clear the following is the command used to create the
base image

sudo ubuntu-vm-builder kvm quantal --kernel-flavour generic main
restricted --rootsize 5G --addpkg openssh-server --addpkg linux-image-
generic --arch i386

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https://bugs.launchpad.net/bugs/1081721

Title:
  quantal to raring upgrade: do-release-upgrade fails to install the new
  kernel

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