Challenges are a bit tricky. Even after playing for many years I still find myself looking up the rules mid-game.
Here are the basics (if memory serves me correctly):
1. Your character/champion issues a challenge, but not to a specific enemy character/champion, just in general. 2. Your opponent can choose to accept or decline. If he/she would like to accpet, then he/she must choose a character/champion model that is in base-to-base contact with the enemy (not the model that issued the challenge per se, just the enemy in general). 3. If your opponent accepts, then he/she moves the accepting model into base contact with the model that issued the challenge. 4. If your opponent declines, then he/she chooses one of his/her character/champion models and moves it to the back rank of the unit. If a back rank does not exist, then the challenge cannot be declined.
In terms of Warriors of Chaos, their character models are forced to always issue and accept challenges. I believe they may even be able to accept challenges without being in base-to-base with the enemy, but I'm not 100% on this.
If your opponent declines a challenge, YOU get to pick which character or champion (of the characters and champions that could have accepted the challenge) gets moved out base to base contact.
Also, there is no mention of "ranks" in the description for refusing a challenge. There simply has to be a rank and file model somewhere in the unit that is not in base to base contact with any enemy models. This is most commonly seen when a character on a monster is in combat with a wide unit in a single rank (5x1 cav for example, one model will not be in base to base contact).
If the person challenged refuses, the challenger chooses the character that is retired. Other than that everything else is right.
Q. If a character is in a unit with only one rank, can he refuse a challenge, as there are no rear ranks for him to be moved to?
A. If there is space in the single rank for him to be positioned where he cannot fight, he may refuse the challenge. If the entire rank is engaged, he cannot avoid the challenge, just as if he were on his own (the challenger hunts him down like the cowardly dog he is!). S. Warhammer Chronicles 2004 page 113
You don't even need to be in combat with his unit. I've had a game where 5 units were all involved in a single combat. Anyone involved in the combat (touching an enemy base) can issue/accept the challenge. The units do not need to be touching.
On WoC: All chaos MODELS capable of issuing challenges must do so in WoC, as per the wording of the rule, not just characters. So although they won't get an Eye of the Gods roll for killing Char's and Large Targets without a Warshrine, Unit Champions also have to issue challenges (although only characters are inclined to accept, so if your opponent rushes in and challenges first you can decline provided you have only a champion in the unit, therefore he is moved so he cannot fight and thus won't issue a challenge. It's kinda ambiguous in the wording, but there is no FAQ or Errata for this wording so RAW must be applied, and all Chaos MODELS must do so... Sad life for WoC players, one major drawback of unit champions for them.
And another point on the rules for challenges: As far as I know, only one challenge per combat per turn is allowed from what I've been told a few times (although I've not bothered to look it up yet so it might be wrong).
Kalandros: I recall arguing contrary to that point in many heated debates. Under the Eye of the Gods army-wide special rule, all models that can issue challenges must issue challenges, the Eye of the Gods individual special rule gives a roll on the chart in the event of killing the enemy. It was decidedly remiss of GW not todistinguish between these. The counter-argument revolved around there being no distinction between an army-wide special rule and an individual special rule, and that in effect there was no such thing as an army-wide special rule.
Fortunately for my exhausted fingers...
"It's kinda ambiguous in the wording, but there is no FAQ or Errata for this wording..."
...is not correct, it's HERE and the very first question clears the situation up neatly.
Also a chaos player can refuse a challenge. This can only happen though if it is the enemy players combat turn and the enemy issues a challenge first. If he does not then the chaos player must issue a challenge. This situation hardly ever happens but it can since most people do not bother to challenge chaos players since they all assume they must accept any challenges offered.[/align]