Heff got it right. The wanna-be captain was quite correctly denied his command because he did not have command ability. That is, the ability to recognize an emergency, treat it as such, and ignore any barking mad orders from ATC or anyone else. The initial engine failure alone merited a declaration of emergency and diversion to point C, even before the fire re-ignited. The situation as presented by the check captain became progressively more ridiculous because the upgrade did not take the correct action at the first opportunity; the check captain then continued to pile on the problems, waiting to see at what point the upgrade would break down and say Mayday. Some people seem to have an aversion to declaring an emergency; possibly due to a fear of the resulting paperwork, possibly for some other reason. Regardless of the cause of this phenomenon, it's a bad thing, and something that is addressed in any PIC checkride, from the Private level all the way up.
The complaint about play-acting is absurd. Sims are not perfect, and I support some degree of training in the real plane; but sims are a very useful tool, and the role of the instructor in assuming the roles of all the different people who talk to the pilot is perfectly acceptable. What do you want? A different hired actor for each role, all sitting in the back of the sim waiting to give you their single line? Training is expensive enough as it is.