This seems like a good idea on the surface, but there's far too many problems in practice.
Let's take a hypothetical non-stop train between A and B. There are 200 standard seats and 50 first class, but there are 220 standard pax and just 10 in first. Seems easy enough. The excess 20 standard pax are allowed to sit in first class, without any additional perks of course, and everyone has a seat. This sounds generally fair; the ten first class passengers may be slightly miffed, but they're getting the service and the standard class passengers aren't so it's not completely devalued their ticket.
However, let's dive into the real world of the railway, and take East Coast as an example. East Coast have a key flow, that is to and from London, but also lots of smaller flows along their route. Lots of people will get on and off at each station along the way.
Let's take a theoretical train starting in London bound for Aberdeen. There are more standard class pax than seats, so the guard (in accordance with this proposal) declassifies FC. Everyone's happy and has a seat as the train trundles North to its first stop, let's say Peterborough.
Or are they? As the catering service in First Class starts, there's going to be a clear differentiation between the SC and FC passengers. FC passengers will have to continuously prove to the train crew that they are FC pax and are therefore entitled to their complimentary offer. The SC pax have no option for an at-seat trolley service (as I suspect the FC staff don't have facilities to take payment), although they can go to the cafe bar. This will probably lead to some uncomfortable moments. Then wi-fi. Complimentary in FC, chargeable in SC. As an upgraded SC passenger, I'll be able to access the complimentary wi-fi free of charge. There's no way of stopping this. In my experience, the FC customer service staff on EC have never asked for proof of entitlement; this is enforced by the guard/ticket inspector.
Another point: who gets the FC seats? An argument could be made that Aberdeen punters get the first call, as they'll be on board for the longest and are, probably, paying more than the Peterborough pax. Alternatively, why should the last people onto the train (the stragglers, running as the doors are being closed) be offered a reward for their tardiness?
Let's then get to out hypothetical first stop, Peterborough. dozens of people leave, only a few join, now there's plenty of seats in Standard. What do we do now? Round the cattle up and send them back where they belong seems fair, but it's probably quite humiliating to be in that situation. I suspect that some people would put up quite a bit of resistance to being moved on.
Let's say the train gets to York and, thanks to a cancelled CrossCountry service, lots of people squeeze in. Once again, SC is overcrowded and FC is opened up. Who now gets the seats? The people who were there in the first place may have a claim, as would the people now stepping on. The FC pax now once again have to put up with us commoners and are probably getting a bit miffed.
This sounds like a crowd pleaser, but it realistically does nothing to help anyone. FC passengers will be disgruntled to be sharing their carriage with the great unwashed after having paid extra for a superior experience. SC passengers will be humiliated by being herded around the train and paraded in front of the FC pax for their entertainment. The self-entitled contingent of our community will insist on receiving the full FC treatment, and refuse to move once they're seated (and will undoubtedly kick up a fuss if you dare try to move them). And the TOC will see decreased sales of FC tickets from both FC passengers who've had their experiences ruined, and SC passengers who will see no need to pay to upgrade to FC. Their answer will be to increase unregulated fares. It also does not incentivise the companies to do what is actually needed to solve the problem; increase standard class seating provision.
This is a terrible idea. I vehemently oppose it with every fibre of my being.