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The Cerebral Palsy Society has taken legal action to recover $5 million it says has been wrested from its control.
The society claims the money, which was placed in a fund by five former directors of its business arm Focus 2000, cannot now be accessed by the new board or the society.
Focus 2000 chief executive Anne Murphy has been suspended while the court action is under way.
Papers were filed at the High Court in Auckland last Friday against Ms Murphy and former Focus 2000 directors Walt Beanland, Christine Williamson, Nikki Pye and John Thorpe.
Focus 2000 chairman Craig Hobbs said the former directors met in October last year and passed a motion to set aside $5 million as seed money for a new Endowment Fund.
They then formed a trust which they control, but has nothing to do with Focus 2000 or the Cerebral Palsy Society.
Mr Hobbs said the society had asked for an endowment fund itself last year so the money could go back to cerebral palsy sufferers, but had been declined.
"The issue is that they have basically gone outside of the bounds of their responsibilities as directors and set up an almost competing trust."
The decision by the former directors to create the Endowment Fund was totally at odds with the rules and requirements of the board, Mr Hobbs said.
"Basically they [former directors] made the decision in a very short space of time and put through a motion in a hurry at a board meeting, it appears, and haven't included anyone else in that decision."
Mr Hobbs said the court will be asked this week to freeze the money until a verdict is reached.
Last February Health Minister Pete Hodgson ordered a review of the quality of Focus 2000's services after allegations of unsafe conditions and medical mistreatment in its residential homes.
That followed a 2004 financial audit resulting in Focus 2000 being forced to repay the ministry $2.5 million for overcharging for its services.
Another review is under way into all aspects of the organisation.
National's disability spokesman, Dr Paul Hutchison, who is involved in that review, said he expected there would be questions in Parliament and a full inquiry into the matter.
"I think this is devastating for families, for the Cerebral Palsy Society."
Mr Hobbs said an interim board had been put in place until professional directors could be brought in to run Focus 2000.
A woman who answered the phone at Ms Murphy's house last night told the Herald the suspended chief executive would not be making any comment.
