The action against Zen Pacific - which must be endorsed by the authority at a meeting on Thursday - was announced by building committee chairman Daniel Lam Chun after a five-hour, closed-door meeting at the authority's headquarters in Ho Man Tin.

The scandal was uncovered in January, when only three of the 34 piles in the two blocks at the Home Ownership Scheme project were found to meet the required standard.

Zen Pacific has previously denied responsibility for the scandal, saying it was the victim of malpractice by now-defunct subcontractor Hui Hon, which carried out the piling work.

The Independent Commission Against Corruption has arrested eight people over the scandal. It was one of a series that led to last week's Legco vote of no confidence in Housing Authority chairwoman Rosanna Wong Yick-ming and Director of Housing Tony Miller. Ms Wong resigned before the vote.

Zen Pacific's sister company, Ngo Kee Construction, will be suspended from tendering for Housing Authority projects while the legal action is proceeding.

But the Wai Kee Group escaped penalties, despite a recommendation by a three-member team, headed by former HSBC chairman John Strickland, that all companies within the corporate group implicated in the scandal be punished.

The report said: 'Anything less would be an insufficient deterrent to others who might be tempted either to put themselves in the same position or to attempt to evade the consequences of their actions.' Mr Lam said the authority would notify all government departments and public organisations about its actions.

The Housing Department's list-management committee will carry out 'stringent inspections' on companies which apply to enter the authority's contractor list. The committee will inform the authority if the major shareholders of the applicants are found to be those from banned companies, Mr Lam warned.

But assistant director of housing Simon Lee Pak-sing did not say whether the companies would also be banned if found to be owned by the same shareholders. 'It will be left to the building committee to decide,' he said. 'We feel that we have already put in place the principles stated in the Strickland Report. The penalties are appropriate.' Both Zen Pacific and Ngo Kee are allowed to appeal to the list-management committee against the penalties. Zen Pacific held an urgent meeting last night after the announcement by the authority, but it had no immediate comment to make.

But Virginia Ip Chiu-ping, of the Hong Kong People's Council on Housing Policy, attacked the building committee for being too lenient and ignoring the penalties recommended by the independent panel.

'The building committee is making their decision behind closed doors,' she said. 'The report is toothless and the [committee members] are not following the recommendations strictly. No one will be willing to take up similar investigation panel posts in the future because their views are not respected.' Mr Lam made an open apology to the public for the spate of building scandals over the past year.