Could someone enlighten me as to what circumstances to use this in? I've played around with it but haven't really understood the practical application of it. Of course, an example would be much appreciated.

First I think it's useful to think about what it does, both to the signal and thus to the resulting harmonic content. It 'folds back' the signal peaks so all the original harmonic content in your signal is still there but you get rather harsh but related high frequencies for the foldback points.

I'll use it with an AD envelope to add a percussive attack to an instrument (ie lots of foldback on the attack and quickly fade to no foldback) and also make the foldback amount and maybe decay time velocity sensitive.

This can give you a cool slappy sax sound. One thing about using it this way, it doesn't exactly come on smoothly, you either have the high frequencies of the foldback or you don't make it to the foldback threshold and you don't have them, you might try some transient velocity sensitive filtering to smooth the waveform when there's small amounts of foldback, to give you a smoother transition and greater expressive range.

Here is how I used it - look at how the clap sound is made (listen by hitting E3 for the clap)