SECURITY
AGREEMENT
THIS SECURITY AGREEMENT (the “ Agreement
”), is entered into
and made effective as of June 30, 2008, by and between Environment Ecology Holding
Co. of China a Florida corporation, with headquarters
located at 391 Hun Yu Lane, Dong Xin Street, Xi’an, Shaanxi
Province, P.R. China (the “ Company
”), and Trafalgar Capital Specialized
Investment Fund, Luxembourg (the “ Secured Party
”). Capitalized words which are otherwise
undefined in this Agreement shall have the same definition as in
the Securities Purchase Agreement entered into by the parties
hereto on the date hereof.
WHEREAS, the Company shall issue and sell to the Secured
Party, as provided in the Securities Purchase Agreement dated the
date hereof, and the Secured Party shall purchase up to Six Million
U.S. Dollars ($6,000,000) of secured convertible redeemable
debentures (the “ Debentures
”) in the respective amounts set forth opposite each Buyer(s)
name on Schedule I attached to the Securities Purchase
Agreement;
WHEREAS, to induce the Secured Party to enter into the
transaction contemplated by the Securities Purchase Agreement, the
Debentures, the Registration Rights Agreement and the Escrow
Agreement (collectively referred to as the “ Transaction
Documents ”), the Company hereby grants to the Secured
Party a first priority security interest in and to the pledged
property identified on Exhibit
“A” hereto (collectively referred to as the
“ Pledged
Property ”) until the satisfaction of the Obligations,
as defined herein below.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, and for other good and valuable
consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1.
DEFINITIONS AND
INTERPRETATIONS
The
above recitals are true and correct and are incorporated
herein, in their entirety, by this reference.
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Section
1.2.
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Interpretations .
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Nothing
herein expressed or implied is intended or shall be construed
to confer upon any person other than the Secured Party any
right, remedy or claim under or by reason hereof.
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Section
1.3.
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Obligations Secured .
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The
obligations secured hereby are any and all obligations of the
Company to the Secured Party now existing or hereinafter
incurred to the Secured Party, whether oral or written and
whether arising before, on or after the date hereof including,
without limitation, those obligations of the Company to the
Secured Party under the Securities Purchase Agreement and the
Debenture and any other amounts now or hereafter owed to the
Secured Party by the Company thereunder or hereunder
(collectively, the “ Obligations
”).
ARTICLE 2.
PLEDGED
PROPERTY, ADMINISTRATION OF COLLATERAL
AND
TERMINATION OF SECURITY INTEREST
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Section
2.1.
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Grant of Security Interest .
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1. Company
hereby pledges to the Secured Party and creates in the Secured
Party for its benefit a security interest for such time until
the Obligations are paid in full, in and to all of in the
property described in “ Exhibit A
” hereto, whether now existing or hereafter from time to
time acquired (collectively, the “
Pledged
Property .”).
(a) Simultaneously
with the execution and delivery of this Agreement, the Company
shall make, execute, acknowledge, file, record and deliver to
the Secured Party any documents reasonably requested by the
Secured Party to perfect its security interest in the Pledged
Property. Simultaneously with the execution and
delivery of this Agreement, the Company shall make, execute,
acknowledge and deliver to the Secured Party such documents
and instruments, including, without limitation, financing
statements, certificates, affidavits and forms as may, in the
Secured Party’s reasonable judgment, be necessary to
effectuate, complete or perfect, or to continue and preserve,
the security interest of the Secured Party in the Pledged
Property, and the Secured Party shall hold such documents and
instruments as secured party, subject to the terms and
conditions contained herein.
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Section
2.2.
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Rights; Interests; Etc.
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(a) So
long as no Event of Default (as hereinafter
defined) shall have occurred and be
continuing:
(i) the
Company shall be entitled to exercise any and all rights
pertaining to the Pledged Property or any part thereof for any
purpose not inconsistent with the terms hereof;
and
(ii) the
Company shall be entitled to receive and retain any and all
payments paid or made in respect of the Pledged
Property.
(b) Upon
the occurrence and during the continuance of an Event of
Default:
(i) All
rights of the Company to exercise the rights which it would
otherwise be entitled to exercise pursuant to
Section 2.2(a)(i) hereof and to receive payments
which it would otherwise be authorized to receive and retain
pursuant to Section 2.2(a)(ii) hereof shall be
suspended, and all such rights shall thereupon become vested
in the Secured Party who shall thereupon have the sole right
to exercise such rights and to receive and hold as Pledged
Property such payments; provided, however
, that if the Secured Party shall become entitled and shall
elect to exercise its right to realize on the Pledged Property
pursuant to Article 5 hereof, then all cash sums received
by the Secured Party, or held by Company for the benefit of
the Secured Party and paid over pursuant to
Section 2.2(b)(ii) hereof, shall be applied against
any outstanding Obligations; and
(ii) All
interest, dividends, income and other payments and
distributions which are received by the Company contrary to
the provisions of Section 2.2(b)(i) hereof shall be
received in trust for the benefit of the Secured Party, shall
be segregated from other property of the Company and shall be
forthwith paid over to the Secured Party; or
(iii) The
Secured Party in its sole discretion shall be authorized to
sell any or all of the Pledged Property at public or private
sale in order to recoup all of the outstanding principal plus
accrued interest owed pursuant to the Debenture as described
herein
(c) Each
of the following events, subject to the lapse of applicable
cure periods, shall constitute a default under this Agreement
(each an “ Event of
Default ”):
(i) any
default, whether in whole or in part, shall occur in the
payment to the Secured Party of principal, interest or other
item comprising the Obligations as and when due or with
respect to any other debt or obligation of the Company to a
party other than the Secured Party;
(ii) any
default, whether in whole or in part, shall occur in the due
observance or performance of any obligations or other
covenants, terms or provisions to be performed under this
Agreement or the Transaction Documents;
(iii) the
Company shall: (1) make a general assignment
for the benefit of its creditors; (2) apply for or
consent to the appointment of a receiver, trustee, assignee,
custodian, sequestrator, liquidator or similar official for
itself or any of its assets and properties; (3) commence
a voluntary case for relief as a debtor under the United
States Bankruptcy Code; (4) file with or otherwise submit
to any governmental authority any petition, answer or other
document seeking: (A) reorganization,
(B) an arrangement with creditors or (C) to take
advantage of any other present or future applicable law
respecting bankruptcy, reorganization, insolvency,
readjustment of debts, relief of debtors, dissolution or
liquidation; (5) file or otherwise submit any answer or
other document admitting or failing to contest the material
allegations of a petition or other document filed or otherwise
submitted against it in any of the proceedings set forth in
this Section 2.2(c)(iii) under any such applicable law, or
(6) be adjudicated a bankrupt or insolvent by a court of
competent jurisdiction; or
(iv) any
case, proceeding or other action shall be commenced against
the Company for the purpose of effecting, or an order,
judgment or decree shall be entered by any court of competent
jurisdiction approving (in whole or in part) anything
specified in Section 2.2(c)(iii) hereof, or any
receiver, trustee, assignee, custodian, sequestrator,
liquidator or other official shall be appointed with respect
to the Company, or shall be appointed to take or shall
otherwise acquire possession or control of all or a
substantial part of the assets and properties of the Company,
and any of the foregoing shall continue unstayed and in effect
for any period of thirty (30) days.
ARTICLE 3.
ATTORNEY-IN-FACT;
PERFORMANCE
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Section
3.1.
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Secured Party Appointed Attorney-In-Fact .
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Upon
the occurrence of an Event of Default, the Company hereby
appoints the Secured Party as its attorney-in-fact, with full
authority in the place and stead of the Company and in the
name of the Company or otherwise, from time to time in the
Secured Party’s discretion to take any action and to
execute any instrument which the Secured Party may reasonably
deem necessary to accomplish the purposes of this Agreement,
including, without limitation, to receive and collect all
instruments made payable to the Company representing any
payments in respect of the Pledged Property or any part
thereof and to give full discharge for the
same. The Secured Party may demand, collect,
receipt for, settle, compromise, adjust, sue for, foreclose,
or realize on the Pledged Property as and when the Secured
Party may determine. To facilitate collection, the
Secured Party may notify account debtors and obligors on any
Pledged Property or Pledged Property to make payments directly
to the Secured Party.
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Section
3.2.
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Secured Party May Perform .
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If
the Company fails to perform any agreement contained herein,
the Secured Party, at its option, may itself perform, or cause
performance of, such agreement, and the expenses of the
Secured Party incurred in connection therewith shall be
included in the Obligations secured hereby and payable by the
Company under Section 8.3.
ARTICLE 4.
REPRESENTATIONS AND
WARRANTIES
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Section
4.1.
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Authorization; Enforceability .
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Each
of the parties hereto represents and warrants that it has
taken all action necessary to authorize the execution,
delivery and performance of this Agreement and the
transactions contemplated hereby; and upon execution and
delivery, this Agreement shall constitute a valid and binding
obligation of the respective party, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors’ rights or by the principles
governing the availability of equitable remedies.
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Section
4.2.
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Ownership of Pledged Property .
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The
Company warrants and represents that it is the legal and
beneficial owner of the Pledged Property free and clear of any
lien, security interest, option or other charge or encumbrance
except for the security interest created by this Agreement and
for the Permitted Liens. For purposes hereof,
“Permitted Liens” shall mean (i) liens for taxes
or other governmental charges which are not yet delinquent or
are being contested in good faith by appropriate proceedings,
(ii) liens for carriers, contractors, warehousemen, mechanics,
materialmen, laborers, employees, suppliers or other similar
persons arising by operation of law and incurred in the
ordinary course of business for sums not yet delinquent or
being contested in good faith, (iii) liens relating to
deposits made in the ordinary course of business in connection
with workers’ compensation, unemployment insurance and
other types of social security or to secure the performance of
leases, trade contracts or other similar agreements; and (iv)
in the case of real property, any matters, restrictions,
covenants, conditions, limitations, rights, rights of way,
encumbrances, encroachments, reservations, easements,
agreements and other matters of record, such state of facts of
which an accurate survey or inspection of the property would
reveal and do not materially interfere with the use or value
of the property.
ARTICLE 5.
DEFAULT;
REMEDIES; SUBSTITUTE COLLATERAL
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Section
5.1.
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Default and Remedies .
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(a) If
an Event of Default described in
Section 2.2(c)(i) or (ii) occurs, then in each
such case the Secured Party may declare the Obligations to be
due and payable immediately, by a notice in writing to the
Company, and upon any such declaration, the Obligations shall
become immediately due and payable. If an Event of
Default described in Sections 2.2(c)(iii) or
(iv) occurs and is continuing for the period set forth
therein, then the Obligations shall automatically become
immediately due and payable without declaration or other act
on the part of the Secured Party.
(b) Upon
the occurrence of an Event of Default, the Secured Party
shall: (i) be entitled to receive all distributions with
respect to the Pledged Collateral, (ii) to cause the
Pledged Property to be transferred into the name of the
Secured Party or its nominee, (iii) to dispose of the
Pledged Property, and (iv) to realize upon any and all
rights in the Pledged Property then held by the Secured Party
as provided herein.
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Section
5.2.
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Method of Realizing Upon the Pledged Property: Other
Remedies .
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Upon
the occurrence of an Event of Default, in addition to any
rights and remedies available at law or in equity, the
following provisions shall govern the Secured Party’s
right to realize upon the Pledged Property:
(a) Any
item of the Pledged Property may be sold for cash or other
value in any number of lots at brokers board, public auction
or private sale and may be sold without demand, advertisement
or notice (except that the Secured Party shall give the
Company ten (10) days’ prior written notice of
the time and place or of the time after which a private sale
may be made (the “ Sale
Notice ”)), which notice period is hereby agreed
to be commercially reasonable. At any sale or sales
of the Pledged Property, the Company may bid for and purchase
the whole or any part of the Pledged Property and, upon
compliance with the terms of such sale, may hold, exploit and
dispose of the same without further accountability to the
Secured Party. The Company will execute and
deliver, or cause to be executed and delivered, such
instruments, documents, assignments, waivers, certificates,
and affidavits and supply or cause to be supplied such further
information and take such further action as the Secured Party
reasonably shall require in connection with any such
sale.
(b) Any
cash being held by the Secured Party as Pledged Property and
all cash proceeds received by the Secured Party in respect of,
sale of, collection from, or other realization upon all or any
part of the Pledged Property shall be applied as
follows:
(i) to
the payment of all amounts due the Secured Party for the
expenses reimbursable to it hereunder or owed to it pursuant
to Section 8.3 hereof;
(ii) to
the payment of the Obligations then due and
unpaid.
(iii) the
balance, if any, to the person or persons entitled thereto,
including, without limitation, the Company.
(c) In
addition to all of the rights and remedies which the Secured
Party may have pursuant to this Agreement, the Secured Party
shall have all of the rights and remedies provided by law,
including, without limitation, those under the Uniform
Commercial Code.
(d) If
the Company fails to pay such amounts due upon the occurrence
of an Event of Default which is continuing, then the Secured
Party may institute a judicial proceeding for the collection
of the sums so due and unpaid, may prosecute such proceeding
to judgment or final decree and may enforce the same against
the Company and collect the monies adjudged or decreed to be
payable in the manner provided by law out of the property of
Company, wherever situated.
(e) The
Company agrees that it shall be liable for any reasonable
fees, expenses and costs incurred by the Secured Party in
connection with enforcement, collection and preservation of
the Transaction Documents, including, without limitation,
reasonable legal fees and expenses, and such amounts shall be
deemed included as Obligations secured hereby and payable as
set forth in Section 8.3 hereof.
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Section
5.3.
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Proofs of Claim .
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In
case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relating
to the Company or the property of the Company or of such other
obligor or its creditors, the Secured Party (irrespective of
whether the Obligations shall then be due and payable as
therein expressed or by declaration or otherwise and
irrespective of whether the Secured Party shall have made any
demand on the Company for the payment of the Obligations),
shall be entitled and empowered, by intervention in such
proceeding or otherwise:
(i) to
file and prove a claim for the whole amount of the Obligations
and to file such other papers or documents as may be necessary
or advisable in order to have the claims of the Secured Party
(including any claim for the reasonable legal fees and
expenses and other expenses paid or incurred by the Secured
Party permitted hereunder and of the Secured Party allowed in
such judicial proceeding), and
(ii) to
collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same; and
any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial
proceeding is hereby authorized by the Secured Party to make
such payments to the Secured Party and, in the event that the
Secured Party shall consent to the making of such payments
directed to the Secured Party, to pay to the Secured Party any
amounts for expenses due it hereunder.
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Section
5.4.
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Duties Regarding Pledged Property .
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The
Secured Party shall have no duty as to the collection or
protection of the Pledged Property or any income thereon or as
to the preservation of any rights pertaining thereto, beyond
the safe custody and reasonable care of any of the Pledged
Property actually in the Secured Party’s
possession.
