Painted paneling is a never ending headache.
It's too easy to damage. Too hard to repair. It usualy looks like shit. You can't just sand the bad spots smooth and add another layer of paint. Even if you can get a smooth surface, the old paint will continue to fail with time. Chances are a fresh coat of wet paint will cause more blistering and chips.

There is only one right way to fix it.
Pull the paneling off, paint the real wall, and be done with it. Even if the wall is buggered up under the paneling, it would be easier to patch plaster or hang sheetrock then sand and repaint a full wall of paneling.