“Zombie” firms who should be allowed to fail but are instead undermining capitalism are holding back Britain’s recovery, according to Ernst and Young.

The accountancy firm has alleged that the financial crisis has created an environment where it is too difficult to fail – so poor businesses are being kept afloat to the detriment of the wider economy.

While there have been some high profile business failures during the downturn, rates of insolvency are below the historic norm for recessions.

While many businesses are struggling, research by Ernst and Young indicated that the number of administrations fell in 2011, despite a 42% increase in profit warnings from listed companies. The firm attributed the shift to a change in attitudes amongst governments and creditors who have given businesses more breathing space since the onset of the crisis.

Alan Hudson, E&Y head of restructuring in the UK noted that many “zombie” firms continue to operate, and are taking valuable market share from firms who have the potential to boost the economy.

 He commented: “The whole thing grinds along very slowly. It is a very unsatisfactory environment that has become so during the crisis which began in 2007-08.”

The firm is now concerned that if lenders continue to fund these failing businesses, capital will not be recycled and reinvested into the economy. While the exact number of floundering businesses is unclear, research by R3 shows that 30% of firms are regularly reliant on their overdraft facility, a gauge of whether a company is viable or not.

Alan Bloom, head of global restructuring at R3 added: “Everything is becoming complicated and making insolvency a difficult option. 

“It means that businesses which probably should fail, don’t fail. In a capitalist economy you get winners and losers.”