One challenge can be issued in each combat that is being fought. For each combat, start with the player whose turn it is. The player may choose any one character from those in base contact wih the enemy to issue a challenge with.
The second player has the option of refusing or meeting the challenge. If he refuses, no challenge takes place and the refusing player must retire a character from the combat as described below. The challenger then fights normally in the following combat. If the challenge is accepted, the player selects one of his characters from those already fighting in the combat to take up the challenge.
If the player whose turn it is does not issue a challenge in that combat, his opponent may issue one himself, which may be accepted or declined in the same way.
Note that a challenge cannot be issued unless there is a character to fight ordinary troopers or monsters cannot take up a challenge.
Also note that in order to participate in a challenge, either to issue it or to meet it, a character must be fighting in combat already. This means that the model must actually be positioned base-to-base against an enemy model. A character that is not already fighting, for example because he is in the front of a formation which has been attacked in the rear, cannot take part in a challenge.