Exhibit 10.3
SECURITY AGREEMENT
     This SECURITY AGREEMENT (the “Agreement”), dated as of October ___, 2009,
is by and between CanArgo Energy Corporation, a Delaware corporation and debtor
and debtor-in-possession (“Borrower”) and Persistency, a Cayman Islands limited
company (“Lender”).
RECITALS:
     WHEREAS, Borrower is currently a debtor and debtor-in-possession in a
bankruptcy case (the “Chapter 11 Case”) commenced under chapter 11 of title 11
of the United States Code (the “Bankruptcy Code”) before the United States
Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”),
Case No. 09-16453 (AJG);
     WHEREAS, Borrower has requested and Lender has this day agreed to make one
or more Loans (as hereinafter defined) pursuant to the terms of the Financing
Agreement (as hereinafter defined) and subject to and upon the terms and
conditions set forth herein and therein;
     NOW, THEREFORE, in consideration of the premises and in order to induce
Lender to make the Loans to Borrower, the parties agree as follows:
     1. Definitions; Certain Terms.
     (a) Definitions. Capitalized words and terms used herein and not otherwise
defined herein shall have the meaning ascribed thereto in the Financing
Agreement:
     “Agreement” means this Agreement and any Exhibits, supplements and
amendments thereto.
     “Bankruptcy Code” shall have the meaning ascribed thereto in the Recitals.
     “Bankruptcy Court” shall have the meaning ascribed thereto in the Recitals.
     “Borrower” shall have the meaning ascribed thereto in the preamble.
     “Budget” shall have the meaning assigned to such term in the Financing
Agreement.
     “Capital Expenditures” shall have the meaning assigned to such term in the
Financing Agreement.
     “Carve-Out Expenses” shall have the meaning assigned to such term in the
Financing Agreement.
     “Chapter 11 Case” shall have the meaning ascribed thereto in the Recitals.
     “Collateral” shall have the meaning assigned to such term in Section 3 of
this Agreement.
     “Conversion” shall have the meaning assigned to such term in the Financing
Agreement.

 

--------------------------------------------------------------------------------

 

     “Default” shall have the meaning assigned to such term in the Financing
Agreement.
     “Disclosure Statement” shall have the meaning assigned to such term in the
Financing Agreement.
     “Event of Default” shall have the meaning assigned to such term in the
Financing Agreement .
     “Excess Budget Variance” shall have the meaning assigned to such term in
the Financing Agreement .
     “Final Financing Order” shall have the meaning assigned to such term in the
Financing Agreement.
     “Financial Statements” shall have the meaning assigned to such term in the
Financing Agreement.
     “Financing Agreement” means that certain Debtor in Possession Financing
Agreement of even date herewith by and between Borrower and Lender pursuant to
which, inter alia, Lender has agreed to make the Loan to Borrower.
     “Financing Orders” shall mean the Interim Financing Order and the Final
Financing Order and any other Order of the Bankruptcy Court authorizing Borrower
to obtain the Loans and to incur and repay the Obligations under the Financing
Agreement and to grant security therefor, in each case, in form and substance
reasonably acceptable to Lender.
     “GAAP” shall have the meaning assigned to such term in the Financing
Agreement.
     “Interim Financing Order” shall have the meaning assigned to such term in
the Financing Agreement.
     “Knowledge” shall have the meaning assigned to such term in the Financing
Agreement.
     “Interim Order Entry Date” shall have the meaning assigned to such term in
the Financing Agreement.
     “Lender” shall have the meaning ascribed thereto in the preamble.
     “Lien” shall have the meaning assigned to such term in the Financing
Agreement.
     “Loan” shall have the meaning assigned to such term in the Financing
Agreement.
     “Loan Documents” shall have the meaning assigned to such term in the
Financing Agreement.
     “NewCo” shall have the meaning assigned to such term in the Financing
Agreement.
     “Obligations” shall have the meaning assigned to such term in the Financing
Agreement.

2

--------------------------------------------------------------------------------

 

     “Order” or “Orders” shall have the meaning assigned to such term in the
Financing Agreement.
     “Permitted Liens” shall have the meaning assigned to such term in the
Financing Agreement.
     “Permitted Priority Lien” shall have the meaning assigned to such term in
the Financing Agreement.
     “Person” shall have the meaning assigned to such term in the Financing
Agreement.
     “Plan” shall have the meaning assigned to such term in the Financing
Agreement.
     “Pledge Agreement” shall have the meaning assigned to such term in the
Financing Agreement.
     “Promissory Note” shall have the meaning assigned to such term in the
Financing Agreement.
     “Requisite Priority” shall have the meaning assigned to such term in the
Financing Agreement.
     “Subsidiary” or, collectively, “Subsidiaries” shall have the meaning
assigned to such term in the Financing Agreement.
     “Subsidiary Guarantee Agreement” shall have the meaning assigned to such
term in the Financing Agreement.
     “UCC” shall have the meaning assigned to such term in the Financing
Agreement.
     (b) Terms Generally. The definitions of terms herein shall apply equally to
the singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words “include”, “includes” and “including” shall be deemed to
be followed by the phrase “without limitation”. The word “will” shall be
construed to have the same meaning and effect as the word “shall”. Unless the
context requires otherwise, (a) any definition of or reference to any agreement,
instrument or other document herein shall be construed as referring to such
agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person’s successors and
assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to
any particular provision hereof, (d) all references herein to Sections and
Exhibits shall be construed to refer to Sections of, and Exhibits to, this
Agreement, (e) all references herein to Schedules shall be construed to refer to
Schedules to the Financing Agreement, and (f) the words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible and intangible assets and properties, including cash, securities,
accounts and contract rights. References in this Agreement to “determination” by
Lender include good faith estimates

3

--------------------------------------------------------------------------------

 

by the Lender (in the case of quantitative determinations) and good faith
beliefs by the Lender (in the case of qualitative determinations).
     (c) Accounting and Other Terms. Unless otherwise expressly provided herein,
each accounting term used herein shall have the meaning given it under GAAP
applied on a basis consistent with those used in preparing the Financial
Statements. All terms used in this Agreement which are defined in Article 8 or
Article 9 of the UCC and which are not otherwise defined herein shall have the
same meanings herein as set forth therein, provided that terms used herein which
are defined in the UCC as in effect in the State of New York on the date hereof
shall continue to have the same meaning notwithstanding any replacement or
amendment of such statute except as the Lender may otherwise determine.
     (d) Time References. Unless otherwise indicated herein, all references to
time of day refer to Eastern Standard Time or Eastern Daylight Saving Time, as
in effect in New York City on such day. For purposes of the computation of a
period of time from a specified date to a later specified date, the word “from”
means “from and including” and the words “to” and “until” each means “to but
excluding”; provided, however, that with respect to a computation of fees or
interest payable to the Lender, such period shall in any event consist of at
least one full day.
     2. Grant of Security Interest.
     (a) As security for the full and timely payment and performance of all of
the Obligations and in accordance with this Agreement, the Borrower hereby and
thereby, as of the Interim Order Entry Date, assigns, pledges, transfers and
grants to the Lender, a first priority security interest in and to and Lien on
all of Borrower’s right, title and interest in, to and under all property of
Borrower, whether now owned or existing or hereafter acquired and wherever
located, with all proceeds, products, replacements, and renewals thereof, as
more particularly described on Exhibit 1 hereto (all of which being herein
collectively called the “Collateral”), subject only to Permitted Priority Liens
and Carve-Out Expenses, as provided in the Financing Agreement, the Financing
Orders and herein.
     (b) Upon entry of the Interim Financing Order or Final Financing Order, as
the case may be, the Liens and security interests in favor of the Lender
referred to in Section 2(a) hereof shall be valid and perfected Liens and
security interests in the Collateral, prior to all other Liens and security
interests in the Collateral, subject only to Permitted Priority Liens (and
Carve-Out Expenses, as provided in the Financing Agreement), with the Requisite
Priority in accordance with Section 364(c)(2) and (3) and (d)(1) of the
Bankruptcy Code and the provisions of the Financing Orders. Such Liens and
security interests and their priority shall remain in effect until all
Obligations shall have been repaid in cash in full or the outstanding amount of
all Obligations has been converted in accordance with the Conversion.
     (c) The Borrower agrees that the Obligations of the Borrower shall
constitute allowed administrative expenses in the Chapter 11 Case, having
priority over all administrative expenses of and unsecured claims against the
Borrower now existing or hereafter arising, of any kind or nature whatsoever,
including, without limitation, all administrative expenses of the kind specified
in, or arising or ordered under, Sections 105, 326, 328, 503(b), 506(c), 507(a),
507(b), 546(c), 726 and 1114 of the Bankruptcy Code (whether or not such
expenses or claims may

4

--------------------------------------------------------------------------------

 

become secured by a judgment lien or other non-consensual lien, levy or
attachment) (subject to Carve-Out Expenses as provided in the Financing
Agreement and the Financing Orders).
     (d) The Liens, lien priority, administrative priorities and other rights
and remedies granted to the Lender pursuant to this Agreement, the Financing
Agreement, the Financing Orders and the other Loan Documents (specifically
including, but not limited to, the existence, perfection and priority of the
Liens and security interests provided herein and therein, and the administrative
priority provided herein and therein) shall not be modified, altered or impaired
in any manner by any other financing or extension of credit or incurrence of
debt by the Borrower (pursuant to Section 364 of the Bankruptcy Code or
otherwise), or by any dismissal or conversion of any of the Chapter 11 Case, or
by any other act or omission whatsoever, other than the Conversion or otherwise
pursuant to the provisions of Section 2.04 of the Financing Agreement.
     3. Grantee Not Liable. Lender shall not have any obligation or liability
under any agreement included in the Collateral by reason of or arising out of
this Agreement or the granting to Lender of a security interest therein, or,
subject to the obligation of the Lender in respect of Carve-Out Expenses,
Permitted Priority Liens in accordance with the Requisite Priority, the
Financing Orders, or the receipt by Lender of any payment relating to any
agreement included in the Collateral pursuant hereto, other than for its gross
negligence or willful misconduct, nor shall Lender be required or obligated in
any manner to perform or fulfill any of the obligations of Borrower under or
pursuant to any agreement included in the Collateral (other than its good faith
obligation to preserve any Collateral in its possession or control to the same
extent that it would preserve any of its own property), or to make any payment,
or to make any inquiry as to the nature or the sufficiency of any payment
received by it or the sufficiency of any performance by any party under any
agreement included in the Collateral, or to present or file any claim, or to
take any action to collect or enforce any performance or the payment of any
amounts which may have been assigned to it or to which it may be entitled at any
time or times. Borrower, including on behalf of its estate, waives any rights
under Section 506(c) of the Bankruptcy Code respecting the Collateral.
     4. Representations and Warranties. Except as provided in the Schedules, the
Borrower hereby represents and warrants to the Lender, as follows:
     (a) Subject to the entry of the Financing Orders, it has title to the
Collateral free from any Lien other than Permitted Priority Liens, the prior
payment of the Carve-Out Expenses having priority of payment over the
Obligations to the extent set forth in the Financing Agreement, the Liens
contemplated by the Financing Orders, this Agreement, the Financing Agreement
and any other Loan Documents.
     (b) It has, subject to entry of the Financing Orders, the full power,
authority and legal right to execute, deliver and perform this Agreement and to
create the collateral security interest for which this Agreement provides.
     (c) Subject to entry of the Financing Orders, this Agreement constitutes a
valid obligation of Borrower, legally binding upon Borrower and enforceable in
accordance with its terms.

5

--------------------------------------------------------------------------------

 

     (d) Except for Permitted Priority Liens, the prior payment of the Carve-Out
Expenses having priority of payment over the Obligations to the extent set forth
in the Financing Agreement or as otherwise provided in this Agreement or the
Financing Agreement and subject to entry of the Financing Orders, the pledge,
hypothecation, assignment and, if applicable, delivery of the Collateral
pursuant to this Agreement creates a valid first priority perfected security
interest in the Collateral and the proceeds thereof.
     (e) Subject to entry of the Financing Orders, the execution, delivery and
performance of this Agreement will not violate or contravene in any material
respect any provision of any existing law or regulation or decree of any court,
governmental authority, bureau or agency having jurisdiction in the premises of
which the Borrower has Knowledge or of any material mortgage, indenture,
security agreement, contract, undertaking or other agreement to which Borrower
is a party or which purports to be binding upon it or any of its material
properties or assets and will not result in the creation or imposition of any
Lien on any of its material properties or assets pursuant to the provisions of
any such mortgage, indenture, security agreement, contract, undertaking or other
agreement except as contemplated herein, and in no event shall the performance
of this Agreement result in a Material Adverse Change.
     5. Covenants. Borrower hereby covenants that during the continuance of this
Agreement:
     (a) Borrower, at its expense, will defend any action that may adversely
affect Lender’s interest in, or Borrower’s title to, the Collateral.
     (b) Except pursuant to Permitted Priority Liens and Carve-Out Expenses, as
provided in the Financing Agreement, or as contemplated by the Plan, the
Financing Orders or the Financing Agreement or as herein provided, without the
prior written consent of Lender, Borrower shall not sell, assign, transfer,
charge, pledge or encumber in any manner any part of the Collateral or suffer to
exist any encumbrance on the Collateral, other than Permitted Liens.
     (c) Borrower shall give, execute, deliver, file and/or record any financing
statement, notice, instrument, document, agreement or other papers that may be
necessary or desirable (in the reasonable judgment of Lender) to create,
preserve, perfect or validate any security interest granted pursuant hereto or
to enable Lender to exercise and enforce its rights hereunder with respect to
such security interest. Borrower shall cause its direct and indirect
Subsidiaries to execute the Loan Documents to which they are parties.
     (d) Borrower will keep the Collateral in good order and repair and will not
waste or destroy the same or any portion thereof except in accordance with its
usual and ordinary business practices; provided, however, Borrower shall not be
required to make any Capital Expenditures not otherwise provided for in the
Budget.
     (e) All information with respect to the Collateral, certificate or other
writing at any time heretofore or hereafter furnished by Borrower to Lender, and
all other written information heretofore or hereafter furnished by Borrower to
Lender, is or will be true and correct as of the date furnished in all material
respects, except for such information, certificate or other writing

6

--------------------------------------------------------------------------------

 

which relates to a date certain in which case such information, certificate or
other writing shall be true and correct in all material respects as of such
date.
     (f) Borrower shall promptly furnish Lender such information concerning
Borrower or the Collateral as Lender may at any time reasonably request.
     (g) Borrower will permit Lender and its representatives at any reasonable
time during normal business hours to inspect any and all Collateral upon
reasonable prior written notice, and to inspect, audit and make copies of and
extracts from all records and all other papers in possession of Borrower
pertaining to the Collateral, and will, on request of Lender, deliver to Lender
copies of all such records and papers.
     (h) If and when so requested by Lender, Borrower will stamp on the records
of Borrower concerning Collateral a notation, in a form reasonably satisfactory
to Lender, of the security interest of Lender under this Security Agreement.
     (i) Except for Permitted Priority Liens and Carve-Out Expenses, as provided
in the Financing Agreement, or as expressly provided in the Financing Agreement
and the Financing Orders, Borrower shall not incur, create, assume, suffer to
exist or permit any claim to have administrative priority which is pari passu
with or senior to the administrative priority granted to Lender under the
Financing Agreement and the Financing Orders.
     6. Remedies; Rights Upon Default; Releases.
     (a) Remedies. Subject to the terms of the Financing Agreement and the
Financing Orders, if an Event of Default shall occur and be continuing, Lender
may exercise all rights and remedies granted to it under this Agreement, the
Financing Agreement and all other rights provided at law or in equity, including
all rights and remedies of a Lender under the UCC and including the right to
immediately terminate its commitment to make any Loans available under the
Financing Agreement. Without limiting the generality of the foregoing, but
subject to the terms of the Financing Agreement and the Financing Orders,
Borrower expressly agrees that in any such event Lender, without demand of
performance or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale) to or upon
Borrower or any other Person (all and each of which demands, advertisements
and/or notices are hereby expressly waived to the maximum extent permitted by
the UCC and other applicable law), may forthwith collect, receive, appropriate
and realize upon the Collateral, or any part thereof, and/or may forthwith sell,
lease, assign, give an option or options to purchase, or sell or otherwise
dispose of and deliver said Collateral (or contract to do so), or any part
thereof, in one or more parcels at public or private sale or sales, at any
exchange or broker’s board or at any of Lender’s offices in the United States or
elsewhere at such prices as it may deem best, for cash or on credit or for
future delivery without assumption of any credit risk. Lender shall have the
right upon any such public sale or sales, and, to the extent permitted by law,
upon any such private sale or sales, to purchase the whole or any part of said
Collateral so sold, free of any right or equity of redemption, which equity of
redemption Borrower hereby releases. Borrower further agrees, at Lender’s
request, to assemble the Collateral and make it available to Lender at places
which Lender shall reasonably select, whether at Borrower’s premises or
elsewhere. Lender shall apply the net proceeds of any such collection, recovery,

7

--------------------------------------------------------------------------------

 

receipt, appropriation, realization or sale, towards payment of the Obligations,
Borrower remaining liable for any deficiency remaining unpaid after such
application, and only after so paying over such net proceeds and after the
payment by Lender of any other amount required by any provision of law need
Lender account for the surplus, if any, to the person entitled by law to receive
such surplus or to Borrower. To the maximum extent permitted by applicable law,
Borrower waives all claims, damages, and demands against Lender arising out of
the repossession, retention or sale of the Collateral except such as arise out
of the gross negligence or willful misconduct of Lender. Borrower agrees that
Lender need not give more than seven (7) days’ notice (which notification shall
be deemed given when mailed or delivered on an overnight basis, postage prepaid,
addressed to Borrower at its address referred to in Section 7(b) hereof) of the
time and place of any public sale or of the time after which a private sale may
take place and that such notice is reasonable notification of such matters.
     (b) Expenses of Lender. Borrower also agrees to pay all costs and expenses
of Lender, including, without limitation, reasonable attorneys’ fees, incurred
after an Event of Default and the expiration of any applicable grace period in
connection with the enforcement of any of its rights and remedies hereunder.
     (c) Waiver. Borrower hereby waives presentment, demand, protest or any
notice not specifically required herein (to the maximum extent permitted by
applicable law) of any kind in connection with this Agreement or any Collateral.
     (d) No Waiver of Rights by Lender. No course of dealing or failure or delay
on the part of Lender in exercising any right, power or privilege hereunder or
with respect to the Financing Agreement shall operate as a waiver hereof or
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise or the exercise of any other right, power or privilege. The
rights of Lender with respect to the Financing Agreement and the rights of
Lender under this Agreement are cumulative and not exclusive of any rights or
remedies which Lender would otherwise have.
     (e) Release of Liens. If requested by Borrower, Lender hereby agrees to
execute and deliver to Borrower all releases, termination statements and other
documents and instruments reasonably requested by Borrower to evidence the
release and termination of all Liens created by the Loan Documents at such time
as all of the Obligations have been converted pursuant to the Conversion,
terminated or otherwise satisfied in accordance with the provisions of the
Financing Agreement and the Financing Orders.
     7. Miscellaneous.
     (a) Merger; Modification of Agreement; Conflict. This Agreement and the
Financing Agreement embody the entire understanding of the parties hereto with
respect to the subject matter hereof and thereof and no modification or waiver
of any provision of this Agreement, and no consent to any departure by Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
Lender. Any such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on Borrower
in any case shall entitle Borrower to any other or further notice or demand in
the same, similar or other

8

--------------------------------------------------------------------------------

 

circumstances. In the event of any conflict between the provisions of this
Agreement and the Financing Agreement, the provisions of the Financing Agreement
shall control.
     (b) Notices. All notices, requests and other communications hereunder shall
be in electronic, telephonic or written (including bank wire, telegram,
telecopier, telex or similar writing) form and shall be given to the party to
whom addressed, at its address or telephone, telecopier or telex number set
forth below, or such other address or telephone, telecopier or telex number as
such party may hereafter specify for the purpose by notice to the other parties
listed below. Each such notice, request or communication shall be effective
(i) if given by telephone, telex, telecopy or electronic means, when such
communication is transmitted to the address specified below and the appropriate
answer is received, (ii) if given by mail, three (3) days after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the address specified below.
If to Borrower:
Vincent McDonnell, President
CanArgo Energy Corporation
150 Buckingham Palace Road
London SW1W 9TR UK
Fax: 0044 207 730 1136
Phone: 0044 207 730 1134
With a copy to:
Peter Basilevsky, Esq.
Satterlee Stephens Burke & Burke LLP
230 Park Avenue, Suite 1130
New York, NY 10169
Fax:     (212) 818-9606
Phone: (212) 818-9200
If to Lender:
Andrew J. Morris
Persistency
c/o Persistency Capital LLC
1270 Avenue of the Americas
Suite 2100
New York NY 10020
Fax:      (646) 619-4642
Phone: (212) 554-1813
With a copy to:
John R. Ashmead, Esq.
Seward & Kissel LLP

9

--------------------------------------------------------------------------------

 

One Battery Park Plaza
New York, New York 10004
Fax:    (212) 480-8421
Phone: (212) 574-1366
     (c) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF NEW YORK EXCEPT
AS GOVERNED BY THE BANKRUPTCY CODE AND EXCEPT AS EXPRESSLY PROVIDED TO THE
CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT.
     (d) CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE. ANY LEGAL ACTION
OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE BANKRUPTCY COURT OR IN THE COURTS OF THE STATE OF NEW YORK IN THE
COUNTY OF NEW YORK OR OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
BORROWER AND THE LENDER EACH HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. THE BORROWER AND THE LENDER EACH HEREBY IRREVOCABLY APPOINTS THE
SECRETARY OF STATE OF THE STATE OF NEW YORK AS ITS AGENT FOR SERVICE OF PROCESS
IN RESPECT OF ANY SUCH ACTION OR PROCEEDING AND FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS AND IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO THE BORROWER OR THE LENDER, AS APPLICABLE, AT ITS
ADDRESS FOR NOTICES AS SET FORTH IN SECTION 7(b) AND TO THE SECRETARY OF STATE
OF THE STATE OF NEW YORK, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER
SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE PARTIES HERETO TO
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST EACH OTHER IN ANY OTHER JURISDICTION.
THE PARTIES HERETO EACH HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
JURISDICTION OR LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT
REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
     (e) WAIVER OF JURY TRIAL, ETC. THE BORROWER AND THE LENDER HEREBY WAIVE ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING
ANY RIGHTS UNDER THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS, OR UNDER ANY
AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT DELIVERED OR

10

--------------------------------------------------------------------------------

 

WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION THEREWITH, OR ARISING FROM
ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE
THAT ANY SUCH ACTION, PROCEEDINGS OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT
AND NOT BEFORE A JURY. THE BORROWER CERTIFIES THAT NO OFFICER, REPRESENTATIVE,
AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
THE LENDER WOULD NOT, IN THE EVENT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM,
SEEK TO ENFORCE THE FOREGOING WAIVERS. THE BORROWER HEREBY ACKNOWLEDGES THAT
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER FOR ENTERING INTO THIS
AGREEMENT.
     (f) Survival of Agreement. All covenants, agreements, representations and
warranties made in this Agreement shall survive the execution and delivery by
Borrower of the Financing Agreement and the Promissory Note and shall continue
in full force and effect and expire upon the earlier to occur of: (i) the
Financing Agreement and the Promissory Note are no longer in effect; (ii) all
sums due hereunder or under the Financing Agreement and the Promissory Note and
all amounts required to be reimbursed or paid by Borrower hereunder or
thereunder are paid in full; or (iii) the Obligations are converted pursuant to
the Conversion or are otherwise satisfied in accordance with Section 2.04 of the
Financing Agreement.
     (g) Assignment. Whenever in this Agreement Lender is referred to, such
reference shall be deemed to include the successors and assigns of Lender as
permitted under the Financing Agreement, and all covenants, promises and
agreements by or on behalf of Borrower which are contained in this Agreement or
the Financing Agreement shall inure to the benefit of the successors and
permitted assigns of Lender. The rights and duties of Borrower, however, may not
be assigned or transferred, except as permitted under the Financing Agreement or
the Financing Orders.
     (h) Severability. The provisions of this Agreement shall be deemed
severable. If any part of this Agreement shall be held unenforceable, by any
court of competent jurisdiction, the remainder shall remain in full force and
effect, and such unenforceable provision shall be reformed by such court so as
to give maximum legal effect to the intention of the parties as expressed
therein.
     (i) Headings. Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
     (j) Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.

11

--------------------------------------------------------------------------------

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in counterparts by their respective officers
thereunto duly authorized as of the date first above written.

            CANARGO ENERGY CORPORATION
      By:           Name:   Vincent McDonnell        Title:   President       
PERSISTENCY
      By:           Name:   Andrew J. Morris        Title:      

12

--------------------------------------------------------------------------------

 

         

Exhibit 1
COLLATERAL

CANARGO ENERGY CORPORATION

     
DEBTOR:
  CanArgo Energy Corporation
 
  P.O. Box 291
 
  St. Peter Port
 
  G11 3RR Guernsey

     All property and assets of the Debtor of what-ever kind and nature,
including but not limited to, the following property of Debtor, whether now or
hereafter owned, existing, acquired or arising and wherever now or hereafter
located, together with all proceeds, products, replacements and renewals
thereof:

  (a)   all Accounts (as defined in the UCC) and all Goods (as defined in the
UCC) whose sale, lease or other disposition by Debtor has given rise to Accounts
and have been returned to, or repossessed or stopped in transit by, Debtor;    
(b)   all Chattel Paper, Instruments, Documents and General Intangibles, each as
defined in the UCC (including, without limitation, all patents, patent
applications, trademarks, trademark applications, trade names, trade secrets,
goodwill, copyrights, copyright applications, registrations, licenses, software,
franchises, customer lists, tax refund claims, claims against carriers and
shippers, guarantee claims, contract rights, contract claims, payment
intangibles, security interests, security deposits and rights to
indemnification);     (c)   all Inventory as defined in the UCC;     (d)   all
Goods as defined in the UCC (other than Inventory), including, without
limitation, Equipment (as defined in the UCC), vehicles and Fixtures (as defined
in the UCC);     (e)   all Investment Property (as defined in the UCC);     (f)
  all Deposit Accounts (as defined in the UCC), bank accounts, deposits and
cash;     (g)   all Letter-of-Credit Rights (as defined in the UCC);     (h)  
all Commercial Tort Claims (as defined in the UCC);     (i)   all equity
interests in Debtor’s direct and indirect subsidiaries;     (j)   any other
property of Debtor now or hereafter in the possession, custody or control of the
Lender or any agent or any parent, affiliate or subsidiary of the Lender or any
participant with the Lender in the Loan (as defined in the Financing Agreement),
for any purpose (whether for safekeeping, deposit, collection, custody, pledge,
transmission or otherwise); and     (k)   all additions and accessions to,
substitutions for, and replacements, products and Proceeds (as defined in the
UCC) of the foregoing property, including, without limitation, proceeds of all
insurance policies insuring the foregoing property, and all of Debtor’s books
and records relating to any of the foregoing and to Debtor’s business.