...Bottom line, it is the Sensei's school and students.
Exactly. In the end, it's the instructor's school and it is the students' choice alone with whom & where they train. If an irreconcilable personality clash arises between a student & teacher...even if the teacher is in the wrong, it's ultimately the student's choice to either stay or go. If they go, then just go...no drama. If they decide to stay, they have to also decide to accept the instructor's style, current skill level and personality quarks and just swallow their pride. Personally, I'd leave.