From the FAQ:

Change the first sentence to read “At the start of the Fight sub- phase, after charges have been made, but before any blows are struck, randomly select a non-vehicle enemy model in base contact with the bearer of the mindshackle scarabs.”

So it takes place after challenges.

Sorry it got so heated, but goddamned as much as mindshackle sucks, it's one of Necron's only defenses against picking up an entire squad due to combat resolution. I'm glad that I was right.