So it seems it could easily have been cleared up by a quick phone call along the lines of:
"Bob, the CAA say your FE has expired and accordingly they've rejected my licence application. Must be some misunderstanding, can you shed any light?"
Let's say though that Bob's FE really had expired and it was a genuine oversight from him and/or the FTO. And the CAA refused to make an exception and recognise the test as valid.
If Bob is an employee of the FTO, then a cosy little meeting with our hero, Bob and the CFI (let's call him Bill) would probably have cleared things up. Our hero would politely explain how disappointed he was at not yet having his license, and that he thought between them Bob and Bill ought to be putting things right without him paying any more money. Bob (newly revalidated) would then take our hero for a pleasant little 2 hour flight, after which he'd fill out the test pass form just like he did the first time.
The paperwork would go off to the CAA and our hero would get his licence. Bob and Bill would discuss behind closed doors who'd cover the aircraft costs for the second 'test', but it's fairly clear that Bob would have to forego his fee.