Originally Posted by TallFlyer

After all the revenue pax have boarded, they start going through the nonrev list in priority order. If at that time they get down to your priority on the list, and there's a seat on the aircraft, you get on the aircraft. If there is a seat in business class, and you've purchased the upgrade, welcome to business class. If you've purchased the upgrade and there is no seat in business class, that upgrade stays in your "bank" for later use, or is refunded after one year.

I don't think you can apply the upgrades to buddy passes, but someone else will have better info than I have.