You are correct, Agent. It is a reduction in housing benefit for people considered to have more bedrooms than needed, with children of either sex expected to share up to the age of 10 and of the same sex up to 18. For each spare room, the housing benefit will be cut by £1-20 a week. So, for a hypothetical family of 5 (mum, dad, and three kids) on housing benefit in a 4 bedroomed house, they would lose perhaps £20 a week off their housing benefit (because at least two of the children will be [probably] able to share). I'm not certain about what the rules are if you have say 3 boys, who could all share a room, since that would lead to them being expected to live in a 2 bedroomed house which doesn't actually have a big enough bedroom... I suspect the social housing restrictions on overcrowding would come into play there. In another hypothetical scenario, a couple with an only child in a 3 bedroomed house... they would also be considered to have a spare bedroom.
It was called a bedroom tax by it's opponents, despite the fact that it is not actually a tax, as an attempt to gain popular opposition to it. Because apparently the facts can't be allowed top stand in the way of political scaremongering...
As far as the case in question goes... I don't know. Whatever system we use, people are going to fall through the cracks; the trick is to make sure people have some leeway to use their own judgement as to whether there's a good reason for not deducting the housing benefit. As I've said before, you can't legislate based on emotion, and you can't see all the other ways things could turn out.