The only play restriction in Walder Frey's passive ability is the timing "After at least 1 defender is declared during a challenge". "Cannot" has 2 effects:
it makes effects fail
it invalidates targets
Initiation can be prevented by:
failure to meet the play restriction
lack of targets
inabilty to pay the cost
Now let's analyse Walder's passive:
Play restriction: "After at least 1 defender is declared during a challenge" (timing)
Cost: "kneel Walder Frey"
Effect: "have him participate on the side that is currently winning the challenge
The play restriction is met (we assume so). No targets, so cannot aspect #2 does not make initiation fail. Barring Black Cells' response on Walder Frey earlier, the cost can be paid. Initiation complete. However, the effect fails because Walder cannot defend.
I see Walder as having two initiations, much like The Maester's Path
1. Play restriction: After at least 1 defender is declared during a challenge
2. Play restriction: Walder Frey must be able to participate in the challenge as either attacker or defender (whichever is relevant at the time his ability initiates).
3. Cost: Kneel Walder Frey
4. Effect: Have him partipicate on the side that is currently winning the challenge
Why is 2 not a second play restriction in this case? If Walder's only ability was 2 and was a triggered effect, would you be able to trigger it here?