As the fallout from Trump’s tariffs continues to be reflected in the freefall of the global financial markets, governments, thinktanks and news outlets struggle to predict what exactly the longer-term impact of a trade war will be and where it will be felt the most. Whilst many of the tariffs have been imposed on a blanket basis on goods imported to the US, other sectors such as automotives and steel are the subject of specific tariffs. We wait to see whether other sector specific tariffs are introduced – an introduction of tariffs on the service industry, which makes up 75% of the UK economy, would have a further dramatic effect. 

But what of the more general impact on UK businesses? The range of factors at play and their complex interaction across global supply chains means that whilst some commentators predict UK inflation will rise as a result, others predict it will fall. And whilst some suggest the Bank of England will cut interest rates to stimulate growth, others think it can’t or won’t (unless inflation remains stable). 

That leaves British businesses facing a changing international trade outlook, an uncertain macroeconomic background and the potential impact of rising inflation and continued high interest rates. None of these are positive for business, and the uncertainty makes it difficult for business leaders to plan effectively. So, what should directors do?

Whilst directors - during a period of financial fragility or uncertain trading conditions - face the same considerations as during trading in the ordinary course, their focus should be even more acute in circumstances where the risk of insolvency is heightened and consequently also the potential for personal liability. Directors should remember: 

• Financial hygiene remains at the heart of decision making. Directors must remain live to the financial position of the business, ensuring they assess the “balance sheet” position (are the assets of the business worth more than its liabilities (including contingent and prospective liabilities)?) as well as testing “cash flow” (can the company pay its debts as they fall due?). 
• Directors also need to consider the continued availability of funding, the terms on which it is available (and its cost) as well as the certainty with which it has been offered.
• Directors must meet regularly and with due haste, where driven by solvency concerns, a critical event or changing circumstances. 
• Where there is any concern that the company is trading in the “twilight zone”, the directors must seek prompt, specialist advice. They must weigh that advice and, using their own independent judgement, decide what steps to take and whether the company should continue to trade. 
• Directors must balance optimism in deciding to trade on, with a realistic assessment of the worst-case scenario. Where the company is, or may be insolvent, or on the brink of insolvency, directors may be required to consider the interests of the company’s creditors (in addition to or rather than the interests of the shareholders).
• Where the business operates across a group of companies, directors must remember that solvency is assessed on a standalone company basis, and not group-wide. That consideration also flows through to the duties owed by directors;  as they are owed to each company, the potential for conflict is magnified where the interests of group companies may start to diverge. 
• Record keeping must remain accurate and timely, with up-to-date management accounts and cash-flow forecasts prepared, and full minutes taken at each board meeting

Directors should also monitor the position of corporate entities in their supply chain – something we considered earlier this year in Navigating counterparty distress: a practical guide – but which is of increased focus given the cross-border nature of supply chains and the international nature of the challenges presented by tariffs. Part of that process should involve a review of the terms of all contracts up and down the supply chain to determine who bears the cost of paying tariffs (and whether there is room for manoeuvre) – that will need to be determined on a case-by-case basis. We considered this in more detail in Navigating trade turbulence: safeguarding UK businesses amidst US tariff introductions.