The judicial review challenge pits Age Concern South Lakeland against the secretary of state for health over the minister's decision last April declining to take steps to amend the offending 1992 National Assistance Regulations.
The charity's solicitor, Louise Ezeonyim, said after a hearing today at London's high court that the case has far-reaching implications for the thousands of elderly people suffering from dementia, many of whom could be covered by the same provisions.
The challenge was initially brought on behalf of 81-year-old Irene Johnson, who died last September after she was transferred to the Holly Bank nursing home from the haven of her own bungalow home.
The guardianship order was imposed due to Mrs Johnson's deteriorating state, and it was judged necessary to take her into the residential home as she could no longer cope on her own.
Despite Mrs Johnson's death, Age Concern are seeking to 'step into her shoes' to continue fighting the case because of the public-interest issues involved.
Cumbria CC transferred Mrs Johnson into the nursing home, where she lived between November 2004 and March 2005, despite her insistence that she wished to stay put.
In all, Mrs Johnson was charged£5,500 for her stint in the nursing home.
Ms Ezeonyim said the local authority was 'adding insult to injury by charging for the accommodation'.
'She felt that it wasn't right to charge her for the accommodation when she didn't even want to live there', the solicitor added.
'We're not against the guardianship order being made in the first place,' she explained. 'We're against the fact that it forces someone to leave somewhere and then charging her for that'.
Mrs Johnson was last year given permission to challenge the legality of the provisions, but the case reached the high court today as Mr Justice Silber was asked to rule on whether Age Concern should be allowed to take over the case.
The judge reserved his decision on that issue at the end of the short hearing.
STRAND NEWS SERVICE