Conflict on the Mat
It is the instructor's job to keep the practice under control. My students will occasionally give each other a hard time if they are peers. Seniors normally know better than to get into that kind of fray with the juniors. I keep an eye on things and if I see a new student who is being resistant in a way that doesn't make sense I'll step in and use him for uke. Normally I can resolve whatever doubts he has about the technique without hurting him. It is innapropriate for any of the students to take it on themselves to teach any other a student a "lesson", that is the job of the instructor who should be able to do so with a degree of finesse, preventing injury to the body or the spirit.
Not having witnessed the incident described I can't say what the instructor may have had in mind. Perhaps he wanted the Sandan to have a lesson in humility. Perhaps he wanted both of them to see what happens when the ego gets out of control. Or perhaps he wasn't paying enough attention to what was happening. I know that long before things get to that point in my class I will have split the two up and given them new partners.