Document:

exv10w4

Exhibit
10.4

PLEDGE AGREEMENT

          This Pledge Agreement (the “Agreement”), dated as of October ___, 2009, is by and
between, CanArgo Energy Corporation, a Delaware corporation (the “Pledgor”) and
PERSISTENCY, a Cayman Islands limited company (the “Pledgee”).

Background

     1. CanArgo Energy Corporation, a Delaware corporation and debtor and
debtor-in-possession (the “Borrower” or “Pledgor”) in a bankruptcy case commenced
under chapter 11 of title 11 of the United States Code before the United States Bankruptcy Court
for the Southern District of New York, Case No. 09-16453 (AJG) has requested loans (the
“Loans”) from the Pledgee, and the Borrower intends to use the proceeds of the Loans in
order to finance its and its subsidiaries’ operating expenses;

     2. As of the date hereof, the Pledgor is the registered and beneficial owner of the
issued and outstanding equity interests listed on Schedule 1 hereto (the “Pledged
Shares”), which Pledged Shares are represented by certificates identified on Schedule 1
hereto (the “Certificates”);

     3. It is a condition precedent to the Pledgee providing the Loans that the Pledgor
shall execute and deliver to the Pledgee, among other things, this Agreement, as security for the
obligations of Pledgor under the Loans.

N O W, T H E R E F O R E,

          In consideration of the premises and the mutual covenants and agreements herein set forth, and
in order to induce the Pledgee to extend the financing described above, the Pledgee hereby agrees
with the Pledgor as follows:

          1. Definitions. Unless otherwise defined herein, capitalized terms used
herein have the meanings ascribed to them in the Financing and Security Agreement, dated as of even
date herewith, between Borrower and Pledgee (the “Financing Agreement”). In the event of a
conflict between this Agreement and the Financing Agreement, the terms of the Financing Agreement
shall control.

          2. Grant of Security. As security for the Obligations (as defined below), with effect
from the Interim Order Entry Date, the Pledgor hereby pledges, assigns, transfers and delivers to
the Pledgee all of its right, title and interest in and to the Collateral (as defined below) and
hereby creates a first priority lien thereon and first priority security interest therein, subject
to (a) the Permitted Priority Liens in accordance with the Requisite Priority, (b) the prior
payment of the Carve-Out Expenses having priority of payment over the Obligations to the extent set
forth in clause “first” of the definition of Agreed Administrative Expense Priorities as it appears
in the Financing Agreement and (c) the provisions of the Financing Orders. As used herein,
"Collateral” shall mean (i) the Pledged Shares, and (ii) all dividends, cash, securities,
investment property, financial assets and other property issued, paid, declared and/or distributed
in connection with the Pledged Shares, or any portion thereof, and (iii) all cash, securities,

 

 

investment property, financial assets and other property paid, issued and/or distributed to or for
the benefit of Pledgor in exchange, redemption or substitution for the Pledged Shares, or any
portion thereof, and (iv) all other cash, securities, investment property, financial assets and
other property paid, issued and/or distributed to or for the benefit of Pledgor as a consequence of
Pledgor’s ownership of the Pledged Shares, or any portion thereof, and (v) all proceeds of the
foregoing. Pledgor and Pledge are simultaneously entering into a security agreement under Guernsey
law with respect to the Pledged Shares. The two agreements are not intended to, and shall not be
construed to, be in conflict as it is the intention of the parties to ensure that the Secured Party
obtains a perfected security interest in the Pledged Shares.

          3. Pledge Documents. On or before the Interim Order Entry Date, the Pledgor shall
execute and deliver to the Pledgee an irrevocable proxy in favor of the Pledgee in respect of the
Pledged Shares in the form set out in Exhibit A hereto (an “Irrevocable Proxy”) and shall deliver to the
Pledgee the Certificates, if same exist, together with signed, undated instruments of transfer
pertaining thereto duly executed in blank.

          4. Representations and Warranties. Except as provided in the Schedules, the Pledgor
represents and warrants to the Pledgee, that:

	 	(i)	 	Subject to the entry of the Financing Orders, it is the legal and
beneficial owner of, and has good and marketable title to, the Collateral that
it will deliver to the Pledgee on the Interim Order Entry Date and, if
applicable, thereafter, subject to no pledge, lien, mortgage, hypothecation,
security interest, charge, option or other encumbrance whatsoever, except (a)
the lien and security interest created by this Agreement and the delivery of
its Pledged Shares to the Pledgee, (b) the Permitted Priority Liens in
accordance with the Requisite Priority, (c) the prior payment of the Carve-Out
Expenses having priority of payment over the Obligations to the extent set
forth in the Financing Agreement and (d) as may be provided pursuant to the
provisions of the Financing Orders;
	 
	 	(ii)	 	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;
	 
	 	(iii)	 	its Pledged Shares have been duly and validly issued and are fully
paid and nonassessable;
	 
	 	(iv)	 	subject to entry of the Financing Orders, this Agreement constitutes
a valid obligation of the Pledgor, legally binding upon the Pledgor and
enforceable in accordance with its terms, except as may be limited by the
Financing Orders and the Financing Agreement;
	 
	 	(v)	 	upon the filing of a UCC-1 financing statement with respect to the
Collateral, and delivery of the Certificates, if same exist, to Pledgee, the
pledge, hypothecation, assignment and, if applicable, delivery of the
Collateral pursuant to this Agreement creates a valid first-priority perfected
security interest in favor of Pledgee in each of the Pledged Shares and the
other Collateral, subject to (a) the Permitted Priority Liens

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	 	 	 	in accordance with the Requisite Priority, (b) the prior payment of the Carve-Out Expenses
having priority of payment over the Obligations to the extent set forth in the
Financing Agreement, (c) the provisions of the Financing Orders and (d) the
provisions hereof;
	 
	 	(vi)	 	no consent of any other party is required in connection with the
execution, delivery, performance, validity, enforceability or enforcement of
this Agreement other than as expressly disclosed in writing to the Lender, and,
other than entry of the Interim Financing Order, the Final Financing Order and
any other orders of the Bankruptcy Court, no consent, license, approval or
authorization of, or registration or declaration with, any governmental
authority, bureau or agency is required in connection with the execution,
delivery, performance, validity, enforceability or enforcement of this
Agreement; and
	 
	 	(vii)	 	upon entry of the Financing Orders, the execution, delivery and
performance of this Agreement by the Pledgor will not violate or contravene 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 Pledgor has Knowledge, or of any material mortgage, indenture,
security agreement, contract, undertaking or other agreement to which Pledgor
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, charge or encumbrance on, or security interest in, any of its properties
or assets pursuant to the provisions of any such mortgage, indenture, security
agreement, contract, undertaking or other agreement, except as contemplated
herein or in the Loan Documents.

          5. Covenants. The Pledgor hereby covenants that from the date hereof through the
Termination Date (as defined below):

     (a) it shall warrant and defend the right and title of the Pledgee conferred by
this Agreement in and to the Collateral at its own cost against the claims and
demands of all persons whomsoever; provided, that the costs and expenses of
any such defense shall not cause an Excess Budget Variance, unless Lender agrees to
an appropriate adjustment to the Budget to account for such costs and expenses;

     (b) except as contemplated by the Financing Orders, the Plan or as herein
provided or in the ordinary course of business, without the prior written consent of
the Pledgee, it shall not sell, assign, transfer, charge, pledge or encumber in any
manner any part of the Collateral or suffer to exist any encumbrance on its portion
of the Collateral, other than (a) the Permitted Priority Liens in accordance with
the Requisite Priority, (b) the prior payment of the Carve-Out Expenses having
priority of payment over the Obligations to the extent set forth in the Financing
Agreement and (c) the provisions of the Financing Orders;

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     (c) it 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 the Pledgee) to create,
preserve, perfect or validate any security interest granted pursuant hereto or to
enable the Pledgee to exercise and enforce its rights hereunder with respect to such
security interest; and

     (d) it shall keep in all material respects full and accurate records relating
to the Collateral, and stamp or otherwise mark such records in such manner as the
Pledgee may reasonably require in order to reflect the security interests granted by
this Agreement.

          6. Delivery of Additional Interests. If the Pledgor shall become entitled to receive
or shall receive any common stock, equity interests and/or certificates (including, without
limitation, any certificate representing a dividend or a distribution in connection with any
reclassification, increase or reduction of capital, or issued in connection with any
reorganization), option or rights, whether as an addition to, in substitution of, or in exchange
for any of the Collateral, the Pledgor agrees to accept the same as the agent of the Pledgee and to
hold the same in trust for the benefit of the Pledgee and to deliver the same forthwith to the
Pledgee in the exact form received, with the endorsement of the Pledgor when necessary and/or
appropriate undated instruments of transfer duly executed in blank, and irrevocable proxies for any
certificates or membership certificates so received, in substantially the form of Exhibit
A, to be held by the Pledgee, subject to the terms hereof, as additional collateral security
for the Obligations.

          7. Obligations Secured; Certain Remedies. This Agreement secures the obligations of
the Pledgor to the Pledgee under the Financing Agreement, and under any other agreements, documents
and instruments executed by the Pledgor in connection with this Agreement or the Financing
Agreement (collectively, the “Obligations”). If a Pledgor Event of Default (as defined
herein) occurs and is continuing, the Pledgee, in addition to the other remedies provided herein,
shall have the remedies of a Pledgee under the Uniform Commercial Code in effect in the State of
New York. The Pledgee will give the Pledgor reasonable notice of the time and place of any public
sale thereof or of the time after which any private sale or any other intended disposition thereof
is to be made. The requirements of reasonable notice shall be met if such notice is mailed to the
Pledgee via registered or certified mail, postage prepaid, at least fifteen (15) days before the
time of sale or disposition. The Pledgee shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any failure to do so or delay in
doing so, except as required by applicable law.

          8. Proceeds from Collateral. All proceeds received by the Pledgee in respect of any
sale of, collection from, or other realization upon, all or any part of the Collateral (less any
expenses of holding, preparing for sale, selling or the like, which shall include the Pledgee’s
reasonable attorneys’ fees and legal expenses) shall be applied to the Obligations, and to the
extent of any excess of such proceeds, to the payment to the Pledgor or upon the order of the
Pledgor, unless otherwise required by applicable law. Notwithstanding the foregoing and anything
herein to the contrary, all proceeds received by the Pledgee in respect of the Collateral shall be
subject to the prior payment of the Carve-Out Expenses having priority of payment over

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the Obligations to the extent set forth in the Financing Agreement, the Permitted Priority Liens in accordance with the
Requisite Priority and as otherwise may be provided in the Financing Orders.

          9. Voting Rights. After any Pledgor Event of Default shall have occurred and be
continuing, the Pledgee shall have the right (after notifying the Pledgor in writing of its
intention to exercise its voting rights with respect to the Pledged Shares) to receive notice of
and to vote the Pledged Shares at its own discretion at any annual or special meeting at which the
holders of the Pledged Shares are entitled to vote. The Pledgee agrees that until a Pledgor Event
of Default occurs and is continuing and the Pledgee shall have given to Pledgor the written notice
referred to in the foregoing sentence, the Pledgor shall have the exclusive voting power with
respect to the Pledged Shares and any other shares, securities or other equity interests
constituting Collateral.

          10. Limitation on Liability. The Pledgor shall be responsible for and the Pledgee is
hereby released from any claim or liability in connection with: (a) safekeeping any Collateral; (b)
any loss or damage to any Collateral; (c) any diminution in value of the Collateral; or (d) any act
or default of another person or entity; provided, that notwithstanding the foregoing,
Pledgee shall have a 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, and provided, further
that Pledgee shall be liable for any act or omission on its part constituting willful misconduct or
gross negligence, but not for consequential or incidental damages in connection therewith.

          11. Default. The Pledgee shall be entitled to enforce the security granted by this
Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the
Financing Agreement), after the Pledgee shall have declared due and payable the entire unpaid
balance of the then outstanding Obligations, accrued interest and any other sums payable by the
Pledgor under the Loan Documents (a “Pledgor Event of Default”).

          12. Termination. This Agreement shall terminate upon the first of the following to
occur: (i) when all of the Obligations shall have been fully and indefeasibly satisfied, including,
without limitation, if the Obligations are converted pursuant to the Conversion or are otherwise
satisfied in accordance with Section 2.04 of the Financing Agreement or (ii) the Financing
Agreement and the Promissory Note are no longer in effect (the “Termination Date”), and at
such time, the pledge, assignment and any and all liens and security interests granted hereby
(including any Irrevocable Proxies) shall terminate and be extinguished and all rights to the
Collateral shall revert to the Pledgor, and the Pledgee agrees that it shall forthwith release the
Pledgor from the Obligations and any other obligations hereunder and the Pledgee, and at the
request of the Pledgor, will promptly execute and deliver to the Pledgor proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement and the release and
termination of all liens and security interests created hereby, and the Pledgee shall return to the
Pledgor all originals of the Certificates, any Irrevocable Proxies and the undated instruments of
transfer and the other items furnished to the Pledgee pursuant to Section 3 hereof or otherwise by
Pledgor.

          13. Further Assurances; Appointment as Attorney-in-Fact. The Pledgor shall from time
to time, and at all times after the security constituted by this Agreement shall have

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become enforceable, execute all such further instruments and documents and do all such things as the
Pledgee may reasonably deem desirable for the purpose of obtaining the full benefit of this
Agreement and of the rights, title, interest, powers, authorities and discretions conferred on the
Pledgee by this Agreement. Pledgor hereby irrevocably appoints the Pledgee its attorney-in-fact,
with full power and authority in its name and on its behalf and as its act and deed, for the
purpose of carrying out the terms of this Agreement, to execute, seal and deliver and otherwise
perfect any deed, assurance, agreement, instrument or act which Pledgee may deem desirable for any
of the purposes of this Agreement; provided, that the Pledgee shall have no right to, and
shall not, exercise the foregoing power of attorney unless and until a Pledgor Event of Default has
occurred and is continuing. The Pledgee shall have full power to delegate this power of attorney
but no such delegation shall preclude the subsequent exercise of such power by the Pledgee itself
or preclude the Pledgee from subsequent delegation to some other person and any delegation may be
revoked by the Pledgee at any time.

          14. No Waiver. No waiver by the Pledgee of any default shall operate as a waiver of
any other default or of the same default on any subsequent occasion.

          15. Remedies Cumulative and Exclusive. The rights and remedies herein are cumulative,
and not exclusive of other rights and remedies which may be granted or provided by law.

          16. Successors and Assigns. All rights of the Pledgee shall inure to the benefit of
the successors and assigns of the Pledgee. All obligations of the Pledgor shall be binding upon
the Pledgor’s successors and assigns. Whenever in this Agreement Pledgee is referred to, such
reference shall be deemed to include the successors and assigns of Pledgee as permitted under the
Financing Agreement, and all covenants, promises and agreements by or on behalf of Pledgee which
are contained in this Agreement or the Financing Agreement shall inure to the benefit of the
successors and permitted assigns of Pledgee. The rights and duties of Pledgor, however, may not be
assigned or transferred, except as permitted under the Financing Agreement or the Interim Financing
Order, Final Financing Order or any other orders of the Bankruptcy Court, or as otherwise agreed in
writing by the Pledgee.

          17. Notices. Any demand upon or notice to the Pledgor hereunder shall be effective
when delivered by hand or when properly deposited in the mails postage prepaid, or sent by
facsimile transmission, receipt acknowledged, or delivered to an overnight courier, addressed to
the Pledgor at the address shown below or at such other address as the Pledgor may advise the
Pledgee in writing. Any notice by the Pledgor to the Pledgee shall be given as aforesaid,
addressed to the Pledgee at the address shown below or such other address as the Pledgee may advise
the Pledgor in writing:

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	If to Pledgee:

	 	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

One Battery Park Plaza

New York, NY 10004

Fax: (212) 480-8421

Phone: (212) 574-1200
	 
	 	 
	If to Pledgor:

	 	CanArgo Energy Corporation

c/o Vincent McDonnell

Fax: (206) 834-7688

Phone: (206) 682-8322
	 
	 	 
	with a copy to:

	 	Peter Basilevsky, Esq.

Satterlee Stephens Burke & Burke LLP

230 Park Avenue

New York, NY 10169

Fax: (212) 818-9606

Phone: (212) 818-9200

          18. GOVERNING LAW. THIS AGREEMENT 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.

          19. CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT 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 PLEDGOR AND
THE PLEDGEE EACH HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE PLEDGOR AND THE PLEDGEE 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

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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 PLEDGOR AND THE
PLEDGEE, AS APPLICABLE, AT ITS ADDRESS FOR NOTICES AS SET FORTH IN SECTION 17 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.

          20. WAIVER OF JURY TRIAL, ETC. THE PLEDGOR AND THE PLEDGEE HEREBY WAIVE ANY RIGHT TO
A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS
AGREEMENT, OR UNDER ANY AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT
DELIVERED OR WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION HEREWITH, 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 PLEDGOR
CERTIFIES THAT NO OFFICER, REPRESENTATIVE, AGENT OR ATTORNEY OF THE PLEDGEE HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT THE PLEDGEE WOULD NOT, IN THE EVENT OF ANY ACTION, PROCEEDING OR
COUNTERCLAIM, SEEK TO ENFORCE THE FOREGOING WAIVERS. THE PLEDGOR HEREBY ACKNOWLEDGES THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE PLEDGEE FOR ENTERING INTO THIS AGREEMENT.

          21. Counterparts. This Agreement may be executed in any number of counterparts, each
of which will be deemed an original, but all of which together shall constitute one and the same
instrument. The delivery by a party of a telecopy or facsimile signature to this Agreement shall
have the same effect as the delivery of an original signature; provided, however, that the parties
shall thereafter promptly deliver original signature pages (although the failure or delay in the
delivery of an original signature shall not vitiate or impair the legally binding effect of a
telecopy or facsimile signature).

          22. Entire Agreement. This Agreement and the documents and instruments referred to
herein (including the Financing Agreement) embody the entire agreement entered into between the
parties relating to the subject matter hereof, and may not be amended, waived, or discharged except
by an instrument in writing executed by the party against whom enforcement of said amendment,
waiver, or discharge is sought.

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          23. Headings. In this Agreement, Section headings are inserted for convenience of
reference only and shall be ignored in the interpretation of this Agreement.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto, by their duly authorized agents, have executed this
Agreement as a sealed instrument as of the ___day of October, 2009.

	 	 	 	 
	IN PRESENCE OF:

	 	PERSISTENCY	
	 
	 	 	
	 

Witness

	 	 By:	
	 

	 		 
	 

	 		Name:
	 

	 		Title:
	 
	 	 	
	 

	 	CANARGO ENERGY CORPORATION	
	 
	 	 	
	 

Witness

	 	 By:	
	 

	 		 
	 

	 		Name:
	 

	 		Title:

 

 

SCHEDULE 1

PLEDGED SHARES

					
	 	 	 	 	 
	Entity
	 	Certificate #
	 	# Percentage Owned
	 
	 	 
	 	 
	 
	 	 	 	100%

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EXHIBIT A

IRREVOCABLE PROXY

          The undersigned, the registered and beneficial owner of   [shares] (the “Shares”) of
[NAME], a                                                       (“name”) [represented by certificates No. [
                    ] and No. [                                   ]],
hereby makes, constitutes and appoints PERSISTENCY, a Cayman Islands limited company (the
“Pledgee”) with full power to appoint a nominee or nominees to act hereunder from time to time, the
true and lawful attorney and proxy of the undersigned to vote 100% of the Shares at all annual and
special meetings of equityholders of [name] or take any action by written consent with the same
force and effect as the undersigned might or could do, subject to the last sentence of the
following paragraph.

          The Shares have been pledged to the Pledgee pursuant to a Pledge Agreement dated [October                     ,
2009] between the undersigned and the Pledgee (the “Pledge Agreement”). Terms defined in or by
reference in the Pledge Agreement shall have the same meanings when used herein. This power and
proxy may be exercised only upon the occurrence and during the continuance of a Pledgor Event of
Default (as such term is defined in the Pledge Agreement).

          This power and proxy is coupled with an interest and is irrevocable and shall remain
irrevocable through the Termination Date (as such term is defined in the Pledge Agreement).

          IN WITNESS whereof the undersigned has caused this instrument to be duly executed this                      day
of [October, 2009].

	 	 	 
	 
	 

	 	 
	 

	 	Name:exv10w5

Exhibit 10.5

THIS SECURITY INTEREST AGREEMENT is made on October 29, 2009

BETWEEN:

	(1)	 	CANARGO ENERGY CORPORATION, a Delaware corporation and debtor-in-possession (the “Debtor”);
and
	 
	(2)	 	PERSISTENCY, a Cayman Islands limited company (the “Secured Party”).

RECITALS

	(A)	 	The Secured Party has agreed to advance loans to the Debtor pursuant to the terms of a
financing agreement dated on or about the date of this security agreement made between the
Debtor and the Secured Party, as amended, varied, supplemented, extended, renewed, restated,
novated or replaced from time to time (the “Financing Agreement”).
	 
	(B)	 	The Debtor is the sole legal and beneficial owner of the Charged Property (as defined below).
	 
	(C)	 	It is a requirement of the Financing Agreement that the Debtor enters into this security
agreement.
	 
	(D)	 	It is expressly understood by the parties that Secured Party shall not seek to enforce its
rights hereunder unless it is permitted to do so under the Loan Documents and Financing Orders
(as such terms are defined below).

IT IS AGREED as follows:

	1.	 	INTERPRETATION
	 
	1.1	 	In this security agreement, including the recitals, the following words and expressions shall
have the meaning set out against them (unless the context requires otherwise):
	 
	 	 	“at any time” includes from time to time and for the time being;
	 
	 	 	“Business Day” means a day (other than a Saturday and Sunday) on which banks are open for
normal business in New York and Guernsey;
	 
	 	 	“certificate” means a certificate of title to securities;
	 
	 	 	“Charged Property” means the assets listed in schedule 1 to this security agreement;
	 
	 	 	“Collateral” means the Charged Property and any Derivative Asset at any time subject to the
security interest created under this security agreement;
	 
	 	 	“Company” means CanArgo Limited, a company incorporated in Guernsey with number 32825, whose
registered office is Martello Court, Admiral Park, St Peter Port,

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	 	 	Guernsey and whose shares or other securities are the subject of the security created under
this security agreement;
	 
	 	 	“Default Rate” shall have the same meaning as “Post-Default Rate” as defined in the
Financing Agreement;
	 
	 	 	“Derivative Asset” means any dividend, distribution, interest on dividends and
distributions, stock, share or other security, right, money or other intangible moveable
property at any time after the date of this security agreement derived from or accruing,
offered or created in relation to, or issued in substitution for, all or any part of the
Charged Property;
	 
	 	 	“Event of Default” means any of the events referred to in clause 6;
	 
	 	 	“Expenses” means all costs (including legal costs), charges, expenses, losses, liabilities
and damages (and any taxes or duties payable on any such items) (in each case, on a full
indemnity basis) suffered or incurred by the Secured Party or its attorney, delegate,
sub-delegate or other appointee, arising out of or in connection with all or any part of the
Indebtedness;
	 
	 	 	“Indebtedness” means any and all present and future moneys, obligations and liabilities in
any currency or currencies (whether actual or contingent and whether owed solely or
jointly and whether as principal or surety or in any other capacity whatsoever) which
shall, from time to time (whether due on demand or upon notice or at fixed dates), be
or become due, owing or incurred by the Debtor to the Secured Party under or in
connection with (a) the Loan Documents and (b) this security agreement
(including all Expenses);
	 
	 	 	“Law” means the Security Interests (Guernsey) Law, 1993;
	 
	 	 	“Loan Documents” shall have the meaning ascribed thereto in the Financing Agreement;
	 
	 	 	“Pledge Agreement” means the pledge agreement dated on or about the date of this security
agreement made between the Debtor and the Secured Party, as amended, varied, supplemented,
extended, renewed, restated, novated or replaced from time to time with respect to the
Security Interest granted to the Secured Party in the Collateral under and in accordance
with the laws of the State of New York;
	 
	 	 	“Security Interest” means any lien, charge, bond, mortgage, pledge, assignment,
hypothecation, title retention, security interest, equitable interest, trust arrangement or
any other agreement or arrangement of any kind having the effect of creating security;
	 
	 	 	“transfer” includes assignment.
	 
	1.2	 	References to the Secured Party include its successors, assigns and nominees and any branch
or agent of the Secured Party in Guernsey or elsewhere. References to the Debtor include its
successors in title and permitted assigns (as the case may be).

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	1.3	 	In this security agreement, unless the context otherwise requires:

	 	(a)	 	references to a person shall include any body corporate or unincorporate;
	 
	 	(b)	 	words denoting the singular shall include the plural and vice versa;
	 
	 	(c)	 	words denoting a gender shall include the other gender and the neuter and
neuter references shall include all genders;
	 
	 	(d)	 	references to recitals, clauses, sub-clauses, paragraphs, sub-paragraphs and
schedules are references to recitals, clauses, sub-clauses, paragraphs and
sub-paragraphs of, and to schedules to, this security agreement;
	 
	 	(e)	 	any reference to any statute or statutory provision shall include a reference
to any order, ordinance or regulation made under it and any such reference shall be
construed as a reference to such statute, statutory provision, order, ordinance or
regulation as amended, modified, consolidated, extended, re-enacted or replaced from
time to time;
	 
	 	(f)	 	a reference to “assets” includes properties, revenues and rights of every
description;
	 
	 	(g)	 	a reference to “authorisation” includes an authorisation, consent, approval,
resolution, licence, exemption, filing, recording, registration and notarisation;
	 
	 	(h)	 	words and expressions contained in this security agreement shall, unless
otherwise defined, bear the same meaning as in the Financing Agreement; and
	 
	 	(i)	 	a time of day is a reference to Guernsey time.

	1.5	 	Unless otherwise defined in this security agreement or the Financing Agreement or unless the
context otherwise requires, words and expressions contained in this security agreement shall
bear the same meaning as in the Law.
	 
	1.6	 	The recitals of, and schedules to, this security agreement form part of this security
agreement and any references to this security agreement shall include those recitals and
schedules.
	 
	1.7	 	Any reference to this security agreement and to any agreement or document referred to in it
shall be a reference to this security agreement or such agreement or document as amended,
varied, supplemented, extended, restated, renewed, novated or replaced from time to time.
	 
	1.8	 	Clause headings are for ease of reference only and shall not affect the construction of this
security agreement.
	 
	2.	 	SECURITY INTEREST

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	2.1	 	In consideration of the Secured Party making available or continuing to make available to the
Debtor loan facilities under the Financing Agreement, the Debtor covenants to the Secured
Party to pay and discharge the Indebtedness and to perform and observe all its other
obligations to the Secured Party on their respective due dates and as a continuing security to
the Secured Party for such payment, discharge, performance and observance, all as may be
required under the Financing Agreement and other Loan Documents, the Debtor, as legal and
beneficial owner of the Collateral (save as set out in this security agreement), with the
intention of creating a security interest in the Collateral in favour of the Secured Party,
pursuant to the provisions of the Law, hereby:

	 	(a)	 	undertakes to deliver to the Secured Party (or its nominee), upon execution and
delivery of this security agreement, the certificates relating to the Charged Property
so that the Secured Party (or its nominee) shall have possession of those certificates,
subject to the terms of this security agreement; and
	 
	 	(b)	 	assigns, transfers and otherwise makes over to the Secured Party (or its
nominee) title to the Charged Property and assigns all right, title and interest in and
to the Derivative Assets.

	2.2	 	The Debtor undertakes, upon execution and delivery of this security agreement and otherwise
at any time as the Secured Party shall require,:

	 	(a)	 	to deliver immediately to the Secured Party, subject to the provisions of this
security agreement, executed but undated instruments of transfer for that part of the
Collateral capable of being so transferred (but with the name of the transferee and the
consideration left blank) and such other documentation as the Secured Party may
require, at any time, in order to enable the Secured Party, at any time, to vest title
to that part of the Collateral in itself or its nominee or any purchaser;
	 
	 	(b)	 	to execute a notice of assignment to the Collateral in the form set out in
schedule 2, to give effect to the relevant provisions of the Law;
	 
	 	(c)	 	to deposit with the Secured Party immediately, all certificates relating to the
Collateral including any certificate which the Debtor receives in relation to the
Collateral at any time after completion of this security agreement;
	 
	 	(d)	 	to assign, transfer or otherwise make over to the Secured Party, immediately on
receipt of a request from the Secured Party, at any time, subject to the provisions of
this security agreement and the Law, title to any of the Collateral not held by the
Secured Party at that time and execute a notice of assignment (in a form provided by
the Secured Party) pursuant to the provisions of the Law;
	 
	 	(e)	 	upon demand by the Secured Party and at the Debtor’s expense, to do promptly
all acts and things and to sign, seal, execute and deliver promptly all documents and
deeds as the Secured Party may require, pursuant to the provisions of this security
agreement or the Law, to:

4

 

	 	(i)	 	perfect, preserve or protect the security interest created or
intended to be created by this security agreement over the Collateral,
including (without limitation) the control of, or title to, any part of the
Collateral;
	 
	 	(ii)	 	enable the Secured Party (or its appointee) to exercise any
rights, powers, discretion or remedies in respect of any part of the
Collateral; and
	 
	 	(iii)	 	give effect to any application, sale or disposal pursuant to
the provisions of this security agreement or the Law (as the case may be).

	2.3	 	The Debtor agrees that:

	 	(a)	 	the security interests created in accordance with the terms of clause 2.1 shall
exist concurrently;
	 
	 	(b)	 	all certificates relating to the Collateral in the possession of the Secured
Party (or its nominee) at any time shall be held by the Secured Party (or its nominee),
subject to the provisions of this security agreement;
	 
	 	(c)	 	title to all of the Collateral held by the Secured Party (or its nominee) at
any time shall be held by the Secured Party (or its nominee) subject to the provisions
of this security agreement.

	2.4	 	If and in so far as the provisions of clause 2.1 shall not be effective to create or perfect
a security interest in any part of the Collateral, the Debtor shall hold that part of the
Collateral on trust for the Secured Party.

	2.5	 	If, at any time, any other certificate relating to any such Collateral is deposited with, or
title to any intangible moveable property forming part of the Collateral is transferred to,
the Secured Party (or its nominee), any such other certificate or property shall, without
further notice or agreement, become subject to the provisions of this security agreement,
except that the provisions of clause 4.1 shall take effect on the date on which any such
certificate is so deposited or title is transferred.

	3.	 	CONTINUING SECURITY AND ITS PRESERVATION

	3.1	 	The security interest created by this security agreement shall be a continuing security for
the Indebtedness for the benefit of the Secured Party, notwithstanding the fluctuation in the
level of liability under the Indebtedness or the partial payment, discharge, performance or
observance of the Indebtedness and shall:

	 	(a)	 	not be discharged or affected by any act, omission, matter or thing (whether or
not it is known to the Debtor or the Secured Party) which, but for this provision,
would reduce, release or otherwise prejudice any of the Debtor’s liability and
obligations under this security agreement, in whole or in part;

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	 	(b)	 	remain binding on the Debtor notwithstanding any amalgamation, reconstruction,
reorganisation, merger, sale or transfer by or involving the Secured Party or the
Debtor; and
	 
	 	(c)	 	be additional to, and shall not merge with or be in any way prejudiced or
affected by, any other guarantee, indemnity, Security Interest, right or remedy, now or
at any time after the date of this security agreement, held by or in favour of the
Secured Party for any of the Indebtedness including (without limitation) any rights of
set-off or counterclaim.

	3.2	 	The Secured Party may concede or compromise any claim that any payment, security or other
disposition is liable to avoidance or restoration.
	 
	3.3	 	The Debtor hereby irrevocably and unconditionally waives any right it may have whatsoever
under the laws of Guernsey or elsewhere at any time (whether or not now existing) of first
requiring the Secured Party (or any trustee or agent on its behalf) to proceed against or
enforce any other rights or security against, or claim payment from, any person before
enforcing this security agreement and this security agreement shall take effect without the
benefit to the Debtor of the droit de discussion.
	 
	4.	 	REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS
	 
	 	 	Representations and Warranties
	 
	4.1	 	The Debtor represents and warrants to the Secured Party that, save as provided in this
security agreement, and subject to entry of the Financing Orders:

	 	(a)	 	subject to the security interest created by this security agreement, the Debtor
is the sole legal and beneficial owner of the Collateral and all rights in relation to
it;
	 
	 	(b)	 	save for the security interest created by this security agreement (or Permitted
Priority Liens and the Carve-Out Expenses), no part of the Collateral or any right in
relation to it is subject to any Security Interest, right of set-off, pre-emption
right, option to purchase or similar rights whatsoever, no claim or counterclaim has
been made or threatened by any person in relation to any such rights in connection with
the Collateral nor are there any circumstances which may give rise to any such claim or
threat and there are no agreements, rights or other matters which affect or might
affect:

	 	(i)	 	all or any part of the Collateral or any rights in relation to
it;
	 
	 	(ii)	 	the validity or enforceability of this security agreement;
	 
	 	(iii)	 	the ability of the Debtor to perform its obligations under
this security agreement;

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	 	(c)	 	the Debtor is duly incorporated under the laws of Delaware and has full
capacity, power and authority to enter into this security agreement and be bound by its
terms;
	 
	 	(d)	 	this security agreement constitutes legal, valid and binding obligations of the
Debtor and creates a valid and effective security interest under the Law, in each case,
enforceable against the Debtor in accordance with its terms;
	 
	 	(e)	 	the creation of the security interest pursuant to the terms of this security
agreement and the performance of any of the transactions contemplated in this security
agreement does not and shall not contravene any restriction to which all or any part of
the Collateral may be subject of which the Debtor has Knowledge;
	 
	 	(f)	 	by entering into this security agreement and by taking any action or entering
into any documents in connection with this security agreement, to the Knowledge of
Debtor, none of the Debtor or any of its directors or other officers shall be violating
or be in breach of:

	 	(i)	 	any provision of any agreement, arrangement or undertaking to
which it is a party or which otherwise affects it or its respective securities
or material assets which violation or breach shall have a material adverse
effect;
	 
	 	(ii)	 	its Certificate of Incorporation or Bylaws ; or
	 
	 	(iii)	 	any law or regulation or any judgement, order, injunction,
ruling or award, in any material respect, of any court, judicial,
administrative or governmental authority or arbitrator of which Debtor has
Knowledge and by or to which the Debtor or any of its assets, businesses or
securities is bound or subject or otherwise affected which violation shall have
a material adverse effect;

	 	(g)	 	to the Knowledge of Debtor, no event has occurred or circumstance
exists which constitutes or, with the giving of notice, lapse of time and/or a relevant
determination, would constitute an Event of Default;
	 
	 	(h)	 	the Company is duly incorporated under the laws of Guernsey and the Charged
Property constitutes all the issued share capital of the Company and such share capital
is fully paid up or credited as fully paid up.

	 	 	Undertakings
	 
	4.2	 	The Debtor undertakes to the Secured Party that (subject to the Financing Orders, Loan
Documents, Permitted Priority Liens and Carve-Out Expenses):

	 	(a)	 	during the subsistence of the security created or intended to be created under
or pursuant to the provisions of this security agreement:

7

 

	 	(i)	 	the Debtor shall (subject to the security interest created by
this security agreement) continue to be the sole beneficial owner of the
Collateral and to all rights in relation to it and shall not permit any person,
other than the Secured Party (or its nominee), to be registered as holder of
the Collateral or any part of it;
	 
	 	(ii)	 	the Debtor shall not and shall not agree or attempt to, and
shall procure that no person shall or shall agree or attempt to, at any time,
other than with the Secured Party’s prior written consent, create, grant,
extend or permit to subsist any Security Interest, right of set-off, option to
purchase or other similar rights whatsoever on, over or affecting all or any
part of the Collateral or any rights in relation to it. The prohibition in
this sub-paragraph shall apply to any Security Interest, right of set-off,
option to purchase or other similar right which ranks or purports to rank in
point of security in priority to, pari passu with, or subsequent to, the
security constituted (or intended to be created) under the terms of this
security agreement;
	 
	 	(iii)	 	the Debtor shall not, and shall procure that no person shall,
take or omit to take or agree or attempt to take or omit to take, any action
which might or shall:

	 	(aa)	 	materially depreciate, jeopardise or otherwise
prejudice the value to the Secured Party of all or any part of the
Collateral;
	 
	 	(bb)	 	alter or dilute the rights attaching to any of the Collateral;
	 
	 	(cc)	 	affect the validity or enforceability of this security agreement;
	 
	 	(dd)	 	affect the ability of the Debtor to perform its
obligations under this security agreement;

	 	(iv)	 	the Debtor shall not (and shall procure that no person shall)
assign, surrender, sell, transfer or otherwise dispose of all or any part of
the Collateral or any rights in relation to it or agree to do so;

	 	(b)	 	until payment, discharge or performance in full of the Indebtedness, the
Charged Property shall continue to constitute all the issued share capital of the
Company; and
	 
	 	(c)	 	immediately procure the amendment of the Company’s articles of incorporation in
the form set out in the draft special resolution contained in schedule 3.

	4.3	 	The representations, warranties and undertakings in clauses 4.1 and 4.2 are made on the date
of this security agreement and are deemed to be repeated on each date on which any of the
representations and warranties and undertakings in the Financing Agreement are repeated with
reference to the facts and circumstances then existing.

8

 

	5.	 	VOTING AND OTHER RIGHTS

	5.1	 	For so long as the Collateral or any part of it is registered in the name of the Debtor or
its nominee and remains subject to the Security Interest granted hereunder, the Debtor
undertakes that (subject to the Financing Orders and the Loan Documents):

	 	(a)	 	it shall, and shall procure that its nominee shall, comply with all obligations
and conditions assumed by, and imposed on, the Debtor in respect of the Collateral or
any relevant part;
	 
	 	(b)	 	in relation to the exercise or performance or observance by it or its nominee
of the rights, privileges, powers and obligations in relation to the Collateral, it
shall, and shall procure that its nominee shall:

	 	(i)	 	not exercise or perform or observe any such rights, privileges,
powers and obligations without the prior written consent of the Secured Party;
	 
	 	(ii)	 	comply, without delay, with any instructions given to it or its
nominee by the Secured Party for the exercise and performance or observance of
any such rights, privileges, powers and obligations;

	(c)	 	it shall, and shall procure that its nominee shall, provide to the Secured
Party or its nominee any executed form of proxy or other document reasonably required
in order for the Secured Party to exercise all voting rights in relation to such
Collateral; provided, that, until an Event of Default shall occur and be continuing the
Secured Party hereby agrees and confirms that the Debtor shall have all and the
exclusive voting power with respect to such securities and any other shares, securities
or other equity interests constituting Collateral; provided, further, that the Debtor
shall not exercise such rights in any way that would have a material adverse effect on
the value of the Collateral; and
	 
	(d)	 	it shall, and shall procure that its nominee shall, promptly forward to the
Secured Party a copy of all notices, correspondence and/or other communications it
receives in relation to the Collateral.

	5.2	 	[Reserved.]
	 
	5.3	 	For so long as the Collateral or any part of it is registered in the name of the Debtor or
its nominee at any time after the occurrence of an Event of Default which is continuing
(subject to the Financing Orders and the Loan Documents), the Debtor shall immediately
exercise, perform or observe, or cause to be exercised, performed or observed, in such manner
as the Secured Party may, in its absolute discretion, direct, such voting and other rights,
powers, privileges and obligations relating to the Collateral which may be exercised,
performed or observed by the registered holder of the Collateral or other holder of such
rights, powers, privileges and obligations.
	 
	6.	 	EVENTS OF DEFAULT

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	6.1	 	Each of the following events shall constitute an “Event of Default” under this security
agreement.:

	 	(a)	 	the occurrence of an “Event of Default” as defined in the Financing Agreement;
or
	 
	 	(b)	 	any breach or failure by the Debtor to discharge, observe or perform any of its
obligations falling due under or pursuant to any provision of this agreement, which, if
any such breach or failure is capable of being cured, is not cured within 5 business
days after written notice of such breach or failure has been provided to Debtor.

	6.2	 	The Debtor shall promptly notify the Secured Party of the occurrence of an Event of Default
or of any circumstances likely, in the reasonable opinion of the Debtor, to give rise to an
Event of Default at such time as it first obtains Knowledge of any such Event of Default or
any such circumstance.

	7.	 	REMEDIES ON DEFAULT

	7.1	 	Upon the occurrence of an Event of Default, subject to the Financing Orders, the Loan
Documents and clause 7.2 below, the Secured Party may:

	 	(a)	 	(if it has not already done so), complete the instruments of transfer of the
securities forming all or part of the Collateral on behalf of the Debtor and any
nominee of the Debtor;
	 
	 	(b)	 	serve notice on the Debtor specifying the particular Event of Default and after
any such service of notice the Secured Party may, in accordance with the provisions of
the Law, sell or apply all or any part of the Collateral in such manner and for such
consideration (whether payable or deliverable immediately or by instalments), as the
Secured Party may, in its absolute discretion, determine; and
	 
	 	(c)	 	give a good discharge for any money received in exercise of its power of sale
and for any right, money or property receivable in respect of all or any of the
Collateral.

	7.2	 	All proceeds received by the Secured Party in respect of any sale of, collection from, or
other realisation upon, all or any part of the Collateral (less any expenses of holding,
preparing for sale, selling or the like, which shall include the Secured Party’s reasonable
attorneys’ fees and legal expenses and subject to the Financing Orders and the Loan Documents)
shall be applied to the Indebtedness, and to the extent of any excess of such proceeds, to the
payment to the Debtor or upon the order of the Debtor, unless otherwise required by applicable
law. Notwithstanding the foregoing and anything herein to the contrary, all proceeds received
by the Secured Party in respect of the Collateral shall be subject to the prior payment of the
Carve-Out Expenses having priority of payment over the Obligations to the extent set forth in
clause “first” of the definition of Agreed Administrative Expense Priorities as it appears in
the

10

 

	 	 	Financing Agreement and the Permitted Priority Liens in accordance with the Requisite
Priority.
	 
	7.3	 	The Secured Party shall not be liable (in the absence of bad faith or willful misconduct):

	 	(a)	 	for any failure to apply or distribute the proceeds of sale of all or any part
of the Collateral in accordance with the provisions of the Law, if the Secured Party
applies or distributes such proceeds in good faith in accordance with this Agreement,
without further enquiry and in accordance with the information expressly known to it at
the time of such application or distribution;
	 
	 	(b)	 	to account for any other loss on realisation or for any default or omission for
which it might be liable, in each case, as a consequence of entering into possession of
any part of the Collateral, in the absence of bad faith or willful misconduct.

	7.4	 	Where a power of sale or application is exercised by the Secured Party in respect of part
only of the Collateral, the security interest created under this security agreement shall
remain in effect over that part of the Collateral in respect of which the Secured Party has
not exercised its power of sale or application, as the case may be.
	 
	7.5	 	Any Derivative Asset received by the Debtor after the occurrence of an Event of Default shall
be held by the Debtor on trust for the Secured Party and shall be transferred promptly to the
Secured Party or as it directs, on demand, or, failing such demand, on receipt by the Debtor.
	 
	8.	 	DELEGATION AND POWER OF ATTORNEY
	 
	8.1	 	After the occurrence of an Event of Default which is continuing, the Secured Party may
delegate, by power of attorney or in any other manner, to any person any right, power or
discretion exercisable by the Secured Party under this security agreement. Any such
delegation may be made upon the terms (including a power to sub-delegate) and subject to any
regulations that the Secured Party may think fit.
	 
	8.2	 	By way of security, the Debtor irrevocably and severally appoints each of the Secured Party
and any of the Secured Party’s attorneys, delegates, sub-delegates or other appointees, as the
Debtor’s attorney, to do all such acts and things and to sign, seal, execute and deliver all
such documents and deeds, in the name and on behalf of the Debtor, which the Debtor is obliged
to do or execute or may do or execute under or in relation to this security agreement and the
Collateral (or any part of it) and to do all such other acts and things and sign, seal,
execute and deliver all such other documents and deeds, deemed necessary or desirable, in the
absolute discretion of the Secured Party, in connection with this security agreement or all or
any part of the Collateral or for the purpose of perfecting, protecting, preserving and
enforcing the security interest created or intended to be created by this security agreement.
The Debtor further covenants with the Secured Party to ratify and confirm any exercise of this
power of attorney by any attorney pursuant to its appointment under this clause.

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	9.	 	EXPENSES
	 
	 	 	Consistent with the provisions of the Loan Documents and the Financing
Orders (including specifically payment of any unpaid Carve-Out
Expenses), the Debtor shall pay to the Secured Party, in the currency
(if the Secured Party so requires) incurred by the Secured Party, all
Expenses suffered or incurred by the Secured Party or its attorney,
delegate, sub-delegate or other appointee and, pending reimbursement,
such outstanding Expenses shall form part of the Indebtedness and
shall bear interest (both before and after judgement) at the Default
Rate from the date the Secured Party or its appointee incurred the
relevant Expenses until such expenses and the interest on them is
irrevocably paid in full. To the extent that Debtor pays any Expenses
pursuant to the Loan Documents such payments shall be paid in lieu of
and shall not be in addition to any Expenses payable hereunder and
vice versa, it being acknowledged and agreed by the Secured Party that
the execution and delivery of this security agreement by Debtor is
merely to further secure the Secured Party and not to duplicate
Debtor’s expenses in respect of the security interests granted
hereunder and under the Loan Documents.
	 
	10.	 	NOTICES
	 
	10.1	 	Any notice, demand or other document to be given or made pursuant to this security agreement
or the Law to the Debtor or the Secured Party (as the case may be) shall be given or made
when:

	 	(a)	 	personally delivered to it; or
	 
	 	(b)	 	posted by prepaid first class post to it at its registered office; or
	 
	 	(c)	 	sent by fax to any fax number recorded for it in clause 10.4 below.

	10.2	 	Any notice, demand or other document to be given or made to the Debtor pursuant to the
provisions of clause 10.1 shall be deemed to have been received:

	 	(a)	 	immediately upon delivery; or
	 
	 	(b)	 	48 hours after posting; or
	 
	 	(c)	 	immediately after receipt of a successful receipt answerback provided that the
fax is sent during normal business hours on a Business Day in the place of receipt / it
is sent before 3p.m. on a Business Day at the place of receipt, failing which it shall
be deemed to be received at 9a.m. on the next Business Day in that place.

	 	 	In proving service it shall be sufficient to prove:

	 	(i)	 	in the case of personal service, that it was handed to the party or delivered
to or left in an appropriate place for receipt of letters at its address;

12

 

	 	(ii)	 	in the case of a letter sent by post, that the letter was properly addressed,
stamped and posted or sent by recorded delivery;
	 
	 	(iii)	 	in the case of faxes, that it was properly addressed and despatched to the
number of the relevant party and there was a successful receipt answerback,

	 	 	provided that any notice, demand or other document given under the terms of clause 10.1
but not received on a Business Day in the place of receipt shall be deemed to have been
given on the next Business Day in that place.
	 
	10.3	 	Any notice, demand or other document to be given to the Secured Party shall only be effective
on actual receipt by the Secured Party, by or on behalf of the person whose details are set
out in clause 10.4 in relation to the Secured Party (or as otherwise notified, at any time, to
the Debtor by the Secured Party).
	 
	10.4	 	The address and fax number for service of any notice, demand or other document to be sent
pursuant to the provisions of clause 10.1 are (subject to any amendment by written notice to
the relevant party in accordance with the terms of this clause) as follows:

	 	 	 
	The Secured Party:

	 	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
	 

	 	One Battery Park Plaza
	 

	 	New York, NY 10004
	 

	 	Fax: (212) 480-8421
	 

	 	Phone: (212) 574-1200
	 
	 	 
	The Debtor:

	 	CanArgo Energy Corporation
	 

	 	[Address]
	 

	 	Fax: (206) 834-7688
	 

	 	Phone: (206) 682-8322

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	with a copy to:

	 	Peter Basilevsky, Esq.
	 

	 	Satterlee Stephens Burke & Burke LLP
	 

	 	230 Park Avenue
	 

	 	New York, NY 10169
	 

	 	Fax: (212) 818-9606
	 

	 	Phone: (212) 818-9200

	11.	 	REDEMPTION OF SECURITY
	 
	11.1	 	Subject to the Debtor having no liability (whether actual or contingent) or other obligation
outstanding in respect of the Indebtedness to the Secured Party and subject to the terms of
the Indebtedness having been satisfied in full, the Secured Party shall, as soon as reasonably
practicable, at the request and cost of the Debtor, re-assign, release or otherwise discharge
the security constituted by or pursuant to this security agreement and pay to the Debtor all
dividends, other distributions, interest or other income paid on and received by the Secured
Party in respect of any part of the Collateral and not applied in discharge of the
Indebtedness.
	 
	11.2	 	Where any discharge is made in whole or in part or any arrangement is made on the faith of
any payment, security or other disposition (including, without limitation, any discharge or
arrangement made in relation to this security agreement) which is avoided or must be restored
on insolvency, liquidation or otherwise, without limitation, the security interest created or
intended to be created in, and the liability of the Debtor under, this security agreement
shall continue as if the discharge or arrangement had not occurred.
	 
	12.	 	ASSIGNMENT AND SUCCESSORS
	 
	12.1	 	Subject to the Loan Documents and Financing Orders, the Secured Party shall have a full and
unfettered right to assign and transfer all or any part of its rights and obligations under
this security agreement to any person, at any time.
	 
	12.2	 	The Debtor shall not assign or otherwise transfer all or any part of its rights, benefits or
obligations arising under this security agreement.
	 
	12.3	 	This security agreement is binding on and enforceable against the Debtor’s successors in
title.
	 
	13.	 	MISCELLANEOUS
	 
	13.1	 	Every provision contained in this security agreement shall be severable and distinct from
every other such provision and if, at any time, under the laws of any jurisdiction, any such
provision is or becomes invalid, illegal or unenforceable, such consequences shall not affect
the validity, legality and enforceability of:

	 	(a)	 	the other provisions of this security agreement in that jurisdiction; and

14

 

	 	(b)	 	that and any of the other provisions of this security agreement in any other
jurisdiction.

	13.2	 	This security agreement may be executed in any number of counterparts, each of which shall be
an original and which together shall constitute one and the same instrument.
	 
	13.3	 	Any failure by the Secured Party to exercise or any delay by it in exercising any right,
power or remedy available to it under the provisions of this security agreement or under the
law or otherwise shall not operate as a waiver of any such right, power or remedy and any
single or partial exercise of any such right, power or remedy shall not prevent any further
exercise of that or any other right, power or remedy. Any right, power or remedy of the
Secured Party under this security agreement may be waived specifically and in writing only.
	 
	13.4	 	The rights, powers and remedies provided in this security agreement are cumulative and are
not exclusive of any rights, powers and remedies provided by the law.
	 
	13.5	 	This security agreement and/or appropriate financing statements to cover the Collateral may
also be filed in the appropriate jurisdiction(s) in the United States, to, to the extent
possible, obtain a perfected security interest in the Collateral; provided, however, that
doing so shall not in any way affect the extent and validity of this security agreement or its
effect under the laws of Guernsey, including, without limitation, the charge provided herein
as a matter of the laws of Guernsey. The Pledge Agreement shall not be deemed to be in
conflict with this security agreement and the parties acknowledge that the purpose of the two
agreements is to ensure that the Secured Party obtains a perfected security interest in the
Collateral.
	 
	13.6	 	In any conflict in interpretation between this security agreement and the Loan Documents, the
provisions of the Loan Documents shall control; provided, that, if any such conflict would
defeat the requirements for obtaining valid security under the Security Interests (Guernsey)
Law, 1993, in such instance the Loan Documents shall not control.
	 
	13.7	 	It is understood that notwithstanding anything herein, Secured party shall have no right to
exercise rights against, and shall do nothing with respect to, the Collateral except as
permitted herein and under the Loan Documents and Financing Orders.
	 
	14.	 	GOVERNING LAW AND JURISDICTION
	 
	14.1	 	This security agreement is governed by, and shall be construed in accordance with, the laws
of Guernsey.
	 
	14.2	 	The Debtor hereby, and subject to the Loan Documents and Financing Orders, after an Event of
Default that is continuing:

	 	(a)	 	agrees that all disputes howsoever arising under, from, or in connection with
this security agreement shall be governed exclusively by, and shall be determined in
accordance with, the laws of Guernsey in the Guernsey courts;

15

 

	 	(b)	 	irrevocably waives, and agrees not to raise, any objection it may have now or
at any time after the date of this security agreement to:

	 	(i)	 	the venue for any action or proceedings arising out of, or in
connection with, this security agreement;
	 
	 	(ii)	 	any claim that any action or proceedings arising out of, or in
connection with, this security agreement have been brought in an inconvenient
forum or otherwise; and

	 	(c)	 	irrevocably agrees that any judgement or order of a Guernsey court resulting
from any action or proceedings brought in accordance with the provisions of this
clause, shall be conclusive and binding on it and may be enforced against it in any
court of any other jurisdiction.

	14.3	 	Subject to the Loan Documents and Financing Orders, after an Event of Default which is
continuing, nothing contained in this clause shall limit the right of the Secured Party to
take any action or proceedings arising out of, or in connection with, this security agreement
in any other court of competent jurisdiction, nor shall taking any such action or proceedings
in one or more jurisdictions preclude any such action or proceedings being taken in any other
jurisdiction (whether or not concurrently).

IN WITNESS WHEREOF the parties have executed this security agreement on the date first appearing on
page 1 above.

CANARGO ENERGY CORPORATION

	 	 	 	 	 
	By:
	 	 
	 	 
	 	 	Name: Vincent McDonnell	 	 
	 	 	Title: President	 	 
	 
	 	 	 	 
	PERSISTENCY	 	 

	 	 	 	 	 
	By:
	 	 
	 	 
	 	 	Name: Andrew Morris	 	 
	 	 	Title: Authorized Signatory	 	 

16

 

SCHEDULE 1

The Charged Property

[ ] shares of £[ ] each comprising all the issued share capital of the Company.

17

 

SCHEDULE 2

Part I

NOTICE OF ASSIGNMENT

	 	 	 
	From:
	 	 
	PERSISTENCY

	 	CANARGO ENERGY
	 

	 	CORPORATION
	 
	 	 
	(the “Assignee”)	 	(the “Assignor”)

2009

	 	 	 
	To:

	 	CanArgo Limited (the “Company”)
	 

	 	[registered address]

Dear Sirs

Security interest agreement between the Assignor and the Assignee dated

2009 (the “Security Agreement”)

Notice of assignment and security interest

We, the Assignor and the Assignee, hereby give you, the Company, notice that, pursuant to the terms
of the Security Agreement, the Assignor has given a security interest to the Assignee (inter alia)
by way of assignment of all its right, title and interest to [ ] shares of £[ ] each in the
capital of the Company (the “Shares”) and to any dividend, distribution, interest or other income,
at any time after the date of the Security Agreement, derived from or accruing, offered or created
in relation to, or issued in substitution for, all or any part of the Shares (the “Derivative
Assets”).

Instructions to the Company

As registered holder of the Shares, the Assignor, hereby irrevocably authorises and instructs the
Company:

	(a)	 	to forward to the Assignee all notices, correspondence and/or other communications it
receives in relation to the Shares and/or any Derivative Assets or any instructions given to
you from time to time in relation to the Shares and/or any Derivative Assets;
	 
	(b)	 	to follow instructions received by you from the Assignee in priority to instructions received
from the Assignor with respect to the Shares and/or any Derivative Assets until such time as
the Assignee advises you in writing otherwise;
	 
	(c)	 	to give to the Assignee all information which the Assignee may request, from time to time, in
writing, in respect of all or any part of the Shares and/or any Derivative Assets;

18

 

	(d)	 	to notify the Assignee in writing in connection with any proposed issue or transfer to the
Assignor or its nominee of further shares in the Company.

The Assignor hereby confirms that it (and not the Assignee) shall be responsible for the payment of
all calls, fees, duties, taxes, expenses and other amounts due from time to time to the Company or
otherwise arising in respect of all or any of the Shares and the Derivative Assets.

The contents of this notice may not be revoked, amended or varied without the prior written consent
of the Assignee.

We should be grateful if you would sign and return to the Assignor and the Assignee the enclosed
form of acknowledgement in relation to this notice.

This notice is governed by and shall be construed in accordance with Guernsey law.

Yours faithfully

	 	 	 	 	 
	PERSISTENCY	 	 
	 
	 	 	 	 
	By:
	 	 
	 	 
	 	 	Name:	 	 
	 	 	Title:	 	 
	 
	 	 	 	 
	and	 	 
	 
	 	 	 	 
	CANARGO ENERGY CORPORATION
	 
	 	 	 	 
	By:
	 	 
	 	 
	 	 	Name:	 	 
	 	 	Title:	 	 

19

 

Part II

ACKNOWLEDGEMENT

CANARGO LIMITED

2009

	 	 	 
	To:

	 	PERSISTENCY (the “Assignee”)

       CANARGO ENERGY CORPORATION (the “Assignor”)

Dear Sirs

Security interest agreement between the Assignor and the Assignee dated ___, October,2009 (the
“Security Agreement”)

We, CanArgo Limited (the “Company”), hereby acknowledge receipt of a notice of assignment (the
“Notice”) dated ___ October, 2009 to us from the Assignee and the Assignor in relation to (inter
alia) security interests given by the Assignor to the Assignee, pursuant to the terms of the
Security Agreement in respect of the Shares and the Derivative Assets (as defined in the Notice).

The Company’s confirmations

In consideration of the Assignee providing to the Debtor (as defined in the Security Agreement)
certain loan facilities from time to time, by executing this letter, the Company hereby:

	 	(i)	 	acknowledges the security created under the Security Agreement in relation to the Shares and
the Derivative Assets;
	 
	 	(ii)	 	accepts the authorisations and instructions to it as set out above and undertakes to comply
with them;
	 
	 	(iii)	 	confirms that it has not received notice of any prior assignment nor of any other security
interest of any kind whatsoever given over or in respect of the Shares, the Derivative Assets
or any other rights in relation to the Shares;
	 
	 	(iv)	 	confirms that it is not aware of any dispute between the Assignor and any person claiming
under it nor of any other opposing or conflicting claims in relation to any of the Shares or
the Derivative Assets or any action whatsoever in respect of any of them;
	 
	 	(v)	 	undertakes to notify the Assignee prior to a request from a third party to approve the
transfer of any of the Shares or shares comprised in the Derivative Assets to any person
(other than the Assignee or its nominee) during the subsistence of the Security Agreement;

20

 

	 	(vi)	 	undertakes not to exercise any rights of set-off, counterclaim, retention or deduction or any
lien or other rights of security that it may have from time to time over all or any of the
Shares or any Derivative Assets; and
	 
	 	(vii)	 	undertakes to inform the Assignee, immediately in writing, if the Company becomes aware of
any dispute, security interest of any kind whatsoever, claim or purported exercise of any
rights over or in relation to any of the Shares, the Derivative Assets or any other rights in
relation to the Shares.

This acknowledgement is governed by and shall be construed in accordance with Guernsey law.

Yours faithfully

Duly authorised signatory

for and on behalf of

CANARGO LIMITED

21

 

SCHEDULE 3

SPECIAL RESOLUTION

22

 

	 	 	 	 	 
	DEBTOR:	 	 
	 
	 	 	 	 
	CANARGO ENERGY CORPORATION	 	 
	 
	 	 	 	 
	By:
	 	 
	 	 
	 	 	Name:	 	 
	 	 	Title:	 	 
	 
	 	 	 	 
	SECURED PARTY:	 	 
	 
	 	 	 	 
	PERSISTENCY	 	 
	 
	By:
	 	 
	 	 
	 	 	Name:	 	 
	 	 	Title:	 	 

23

 

	 	 	 
	DATED
	 	2009

BETWEEN

CANARGO ENERGY CORPORATION

and

PERSISTENCY

 

SECURITY INTEREST AGREEMENT

relating to shares in the capital of CanArgo Limited

 

Advocates and Notaries Public P.O. Box 186 1 Le Marchant Street St. Peter Port Guernsey GY1 4HP Channel Islands

Telephone +44 (0) 1481 723466 Fax +44 (0) 1481 714653 advocates@ozannes.com www.ozannes.com

 

 

INDEX

	 	 	 	 	 	 	 
	Clause	 	 	 	Page number
	number	 	 	 	 	 	 
	1.

	 	Interpretation	 	 	1	 
	2.

	 	Security Interest	 	 	3	 
	3.

	 	Continuing Security and its Preservation	 	 	5	 
	4.

	 	Representations, Warranties and Undertakings	 	 	6	 
	5.

	 	Voting and Other Rights	 	 	9	 
	6.

	 	Events of Default	 	 	9	 
	7.

	 	Remedies on Default	 	 	10	 
	8.

	 	Delegation and Power of Attorney	 	 	11	 
	9.

	 	Expenses	 	 	12	 
	10.

	 	Notices	 	 	12	 
	11.

	 	Redemption of Security	 	 	14	 
	12.

	 	Assignment and Successors	 	 	14	 
	13.

	 	Miscellaneous	 	 	14	 
	14.

	 	Governing Law and Jurisdiction	 	 	15	 
	 
	 	 
	Schedules
	 
	 	 
	1

	 	The Charged Property	 	 	17	 
	2

	 	Notice of assignment	 	 	18	 
	3

	 	Special Resolution	 	 	22

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