If they are threatening court action this must have been going on sometime.
The claptrap about the court test case is not claptrap - it is the current legal position.
The UK has an odd way of looking at unauthorised overdrafts and complain about the charges. In many countries, including the US, it is a criminal offence - after all, it is helping yourself to money that is not yours
However, to answer your question - they are within their rights as your wife agreed to the terms and conditions that she was supplied with, in writing.
Whether they are just or not is a moral issue - from your view point, they are not. From their view point they are.
As already said, she may be able to claim the charges back when the courts have made their final decisions.