Depending on the skills of Bloggs, the instructor will "hover" over the controls, with just a smidgen of touch, but not enough that the student thinks that the instructor is ghosting and that poor Bloggs isn't being given a chance to make a mistake, and thus learn. We have all had a qfi who we could feel on the controls - autorotations in a helicopter are a classic case.
The time taken for the thought to change from "This guy's doing great! I can back off a bit" to "Why the fork did he do that??" and take over, can be surprisingly short. In this case, the qfi is concerned with the pedals and the sound of hitting the light, when Bloggs surprises him by yanking back on the stick. Easy to be overpowered by a sudden yank while concentrating on your feet. I would side with the school on this one, and say that such a Bloggs would never have made it as a pilot, and no compensation for missing out on his Captain's pay at Cathay would be applicable.