Tariffs and Insolvency: Legal Consequences of Tariffs in Insolvency Processes

Under the Trump administration, the U.S. has adopted sweeping tariffs on nearly every trading partner, with a promise of more on a range of strategic sectors including industrial metals and critical minerals, pharmaceuticals, semiconductors, and automobiles. These actions have provoked countermeasures from China and others. While these developments are rightly seen as geopolitical, trade actions—and the uncertainty they create for market access and supply chains—have direct and increasingly material implications for companies in financial distress, and for their advisers.

This article is the first in a series that will analyze these intersections and consider how trade barriers function as both cause and complication in corporate insolvencies and restructurings. We focus primarily on U.S. law, with comparative UK and EU observations.

Overview of Recent Tariff Actions
Since President Trump announced his first wave of tariffs on Mexico, Canada and China on February 1 in response to the fentanyl crisis, U.S. trade policy has been in flux. The administration has imposed reciprocal tariffs globally to combat trade deficits in goods under emergency authorities; initiated at least nine new national security trade investigations and significantly expanded duties from preexisting investigations in steel, aluminum and automobiles; and threatened or deployed additional tariffs as a tool to achieve foreign policy goals. Each of these regimes comes with its own, often shifting exceptions and exclusions, while breakneck trade negotiations and announcements of new deals continue among the United States and its largest trading partners.

Suffice to say these actions have created significant uncertainty for producers, importers and investors.

First, in an environment where tariff levels cannot be pinned down, companies struggle to make predictions about their operations, with significant implications for cash flow, liquidity, balance sheets and M&A activity. For example, in mid-April, tariffs on Chinese goods increased to a minimum of 145% (subject to certain key exceptions) before coming back down to 30% over a month later. This escalation essentially froze new orders and shipments and hit the brakes on many merger talks, resulting in a decrease in bilateral trade to levels not seen since the 2008 financial crisis.

Second, distressed companies also face legal uncertainty that can have significant impacts on liquidity. This includes ongoing litigation over the President’s power to enact tariffs under the International Economic Emergency Powers Act (IEEPA). Importers sued and obtained a permanent injunction against President Trump’s unprecedented use of IEEPA for tariffs,¹ a decision that, if upheld, would require the U.S. Government to not only cease collecting duties but refund importers all duties paid on IEEPA tariffs since March 2025. Although the injunction was stayed by a federal court of appeals, the Trump administration will surely appeal any adverse merits result to the U.S. Supreme Court.

Moreover, the very nature of U.S. customs complicates financial planning. The importer of record self-declares the valuation, classification, and country of origin of goods upon entry into the United States and calculates and pays estimated duties based on those representations. However, U.S. Customs and Border Protection (CBP) has up to 314 days to finalize, or “liquidate,” final tariff liability. This limbo period makes mitigating tariff exposure in an environment of heightened CBP scrutiny especially hard: the more importers turn to alternative means of declaring entries, the greater deltas they may see between their estimated payments and final liability.

Finally, contractual and commercial disputes over allocation of tariff liability affect liquidity and ultimately solvency, especially for companies that rely on imports for their margins. Companies across the supply chain must assess their exposure, and disputes over who bears ultimate responsibility under contract may spill over into a broader restructuring conversation.

In response to recent U.S. tariffs, the European Commission had reinstated and expanded a suite of trade countermeasures (including import duties on a wide range of U.S. products and targeted export restrictions) under the EU Enforcement Regulation and Article 8 of the WTO Agreement on Safeguards. However, following the recently announced EU-U.S. trade deal at the end of July 2025, the EU has agreed to lift these countermeasures, at least temporarily. The EU has also intensified the use of other trade defense measures by launching new anti-dumping (AD) and countervailing duty (CVD) investigations targeting sectors like green technologies and metals. These evolving trade defense measures complicate restructuring efforts, as provisional duties and extended investigations introduce contingent liabilities that are difficult to quantify.

Meanwhile, the UK has not adopted any retaliatory tariffs, but it has expanded its use of trade defense instruments, including safeguards and AD cases in sectors like steel. In May 2025, the UK and U.S. agreed to the non-binding UK-U.S. Economic Prosperity Deal (EPD), which outlines reciprocal tariff reductions in sectors such as automotive, steel, aluminum and beef, and envisions enhanced cooperation on regulatory standards and digital trade. While the EPD offers partial relief from U.S. Section 232 tariffs for UK-origin goods, implementation depends on further bilateral negotiations and U.S. security assessments. The non-binding nature of the EPD further limits its usefulness in long-term financial planning, making it difficult for distressed companies to assess future tariff exposure or stabilize forecasts.

Tariff Exposure as an Insolvency Risk
Tariffs operate as a regulatory surcharge on international trade flows. They can alter the legal and commercial viability of contracts, introduce acute volatility into cost structures, and distort supply chain logic. The current tariff posture also introduces considerable uncertainty for companies attempting to navigate rapid policy shifts that carry significant commercial implications. This volatility can accelerate balance sheet deterioration and undermine restructuring efforts for distressed companies. For example:

• Contractual performance and burdensome obligations: Executory contracts priced before a tariff increase may become significantly loss-making once new tariffs are imposed. Supply chain shocks from tariffs can also impede contract performance or increase costs of compliance.
• Working capital erosion: Duty hikes can increase the landed cost of goods by double-digit percentages. For import-intensive businesses, this can result in a substantial drawdown of working capital facilities, especially where inventory turns are slow or margins thin.
• Valuation and cash flow uncertainty: When companies that ship or import face new tariffs, they often reprice goods, rebalance financials, and in some cases, even reassess whether operations are still feasible. Tariff unpredictability complicates the valuation of assets, business plans and exit scenarios. Lenders and buyers may discount collateral or enterprise value due to tariff exposure, frustrating refinancing or sale efforts.

Recent bankruptcy filings have begun to cite tariffs as a significant cause of insolvency. We will discuss the legal treatment of tariffs in specific insolvency regimes (including U.S. chapter 11) in the next part of this series, but restructurings precipitated by tariffs highlight that courts will have to engage with trade measures as part of the fact matrix underpinning a restructuring, for example, valuation disputes and plan feasibility in chapter 11 cases. In addition, outside the U.S. (where a court-controlled bankruptcy process for creditor protection is mandatory), insolvency, or where a company is encountering ‘financial difficulty’, is a jurisdictional prerequisite. Other restructuring pre-requisites (like having no better alternative in a Part 26A proceeding in the UK) will also require new evaluations.

Impact of U.S. tariffs on sector-specific distress for UK businesses
Emerging tariff measures and evolving trade defense regimes should be treated as part of early warning assessments and contingency planning. Attention to the availability and limits of customs mitigation tools, the impact of retaliatory tariffs, and the ongoing risk of further policy shifts is a must. Cross-border companies also should assess whether restructuring supply chains or reallocating distribution channels is feasible given differential tariff burdens across jurisdictions.

While UK and EU businesses have obtained a measure of stability with recently announced trade frameworks, they are still grappling with significant uncertainty. The exact impact is still unfolding but is directly affecting various sectors with transatlantic supply chains, like automotive, healthcare, retail, hospitality and leisure, mining, and consumer products.

The automotive sector is particularly exposed, with UK-based manufacturers and suppliers facing rising costs, especially for electric vehicles (EVs) and related components. The consumer goods sector is also under pressure, as higher tariffs on home goods and textiles intensify operational challenges for retail-focused businesses. Beyond retail and automotive, the effects of tariff uncertainty are spreading to industries such as mining, where steel producers are beginning to see reduced demand from U.S. buyers facing increased costs. In the hospitality and leisure sectors, some businesses have cited tariff-related volatility as a contributing factor to ongoing liquidity strains.

UK and EU businesses must remain agile, proactively assess emerging risks and supply chains, and prepare for potential disruptions to help mitigate the financial impact of these tariffs and maintain competitiveness.

Restructuring Guidance on Immediate Practical Actions for UK and EU-based Businesses

Recommended Actions—High Priority

• Conduct a granular tariff exposure audit using actual Harmonized System (HS) codes across all inventory lines.
• Trace supply chain origin and transformation points to verify compliance and identify weak links.
• Engage with specialist customs advisors to monitor active or pending Section 232 investigations.
• Review hedging positions and FX strategy considering dollar volatility and imported input pricing risk.

Recommended Actions—Medium Priority

• Explore diversification of sourcing from jurisdictions outside U.S. tariff exposure.
• Recalibrate inventory strategies for at-risk product categories.
• Stress-test customer and supplier contracts for enforceability of tariff pass-through clauses, especially in long-term fixed-price arrangements.

Considerations— Legal and Structural Risk

• Tariff classification disputes: Misclassified goods may trigger retroactive penalties or customs claims—a due diligence blind spot in many insolvency scenarios.
• Section 232 scope creep: Investigations can be broadened to capture components and derivative products; monitor Federal Register notices and public hearing outcomes.
• Supply chain entanglement: Rules of origin, subcontracting stages and minimal transformation thresholds can undermine compliance assumptions.
• UK bilateral framework ambiguity: Sector-specific arrangements vary significantly; a one-size-fits-all legal strategy is insufficient.

Tariff-Driven Distress Strategic Restructuring Playbook

Considerations for UK businesses impacted by trade tensions, U.S. Section 232 tariffs and global supply chain volatility

1. Exposure

• • Assess and identify at-risk products using HS codes and tariff classification tools.
  • Review contracts—for pass-through clauses and termination rights (recent case law has demonstrated that force majeure is not likely to applicable).
  • Work with trade compliance advisors to assess tariff exposure and future risks (e.g., EVs, steel, aerospace).

2. Model Financial Impact

• • Run liquidity scenarios accounting for:
    • Tariff reinstatements or increases
    • Foreign exchange fluctuations
    • Demand-side slowdowns
  • Evaluate working capital stress and covenant headroom.

3. Monitor Early Warning Signs

• • Rising input costs, delayed payments or supplier distress
  • Withdrawal of credit insurance
  • Margin compression in tariff-sensitive sectors (e.g., metals, EV, pharma)
  • Creditor pressure, statutory demands, judgments, threat of winding up proceedings

4. Explore Restructuring Options

Out-of-court tools:

• • Supplier renegotiations on material terms, e.g., pricing and payment timing
  • Contract standstills
  • Asset disposals/sale of subsidiaries, brands, IP or operational divisions to raise cash and deliver
  • Equity injection from shareholders/sponsors
  • Debt for equity swap to restore debt profile
  • Refinancing/bridge capital/amend and extend agreements
  • Debt sales/loan to own strategies
  • Informal debt write-offs
  • Payment holidays/deferred interest arrangements
  • Contingency planning/pre-pack negotiations in the background may assist to preserve value and stakeholder disruption.

Formal tools:

• • CVA—reduce overhead and supplier costs (usually where there are no secured creditors)
  • Pre-pack Administration—preserve value and jobs through asset or business asset transfer
  • Part 26A Restructuring Plan—bind dissenting creditors; avoid insolvency; create new liquidity runway and more efficient platform for the business to survive
  • Scheme of Arrangement—supervised compromise for debt or equity

5. Realign Operations

• • Diversify supply chains to reduce exposure to high-tariff jurisdictions.
  • Restructure logistics and inventory strategy.
  • Shift toward localized or D2C manufacturing where viable.

6. Manage Stakeholders

• • Engage proactive dialogue early with:
    • Lenders and credit insurers
    • Key suppliers and customers
    • Restructuring professionals
  • Ensure directors are aware of their directors’ duties in distress and where the creditor duty shifts.

7. Consider Cross-Border Risks

• • Be alert to public law claims (e.g., customs duties) in insolvency noting that import duties (unless covered under a specific statutory duty) are not preferential creditors under the Insolvency Act 1986 and the Insolvency Rules 2016 (as amended) and rank with other unsecured creditors.
  • Review regulatory regimes (e.g., UK NSIA, EU FDI, S. CFIUS) if restructuring involves asset sales or foreign investment.
  • Cross-border enforcement coordination to ensure a structured, approach to ensuring that creditor actions (e.g., appointment of administrators, receivership, asset seizure, court proceedings) are recognized, effective and consistent across jurisdictions, especially when a debtor is in financial distress or formal insolvency proceedings are threatened or involved.

Key Takeaway
Tariff exposure is not just a trade issue—it’s a strategic restructuring issue. Acting early, supported by legal and financial professionals, will give your business the best chance of preserving value and avoiding formal insolvency.

¹ V.O.S. Selections, Inc. v. United States, Case No. 25-00066, Slip Op. 25-66 (CIT May 28, 2025).