The Torch/Shield/Sword situation is a good example of the cardinal rules of gaming.3. Making sure on the hand rules --> That's also something I would do myself. Rules are rules. If it was established that you hold a torch and a sword when initiative is rolled you can't start the combat with a shield. Even worse, you need to use a whole action to equip the shield, so you are probably better off not using a shield this combat at all. That should just be a lesson learned and next time the groups gets the Wizard or someone else who doesn't use shields to hold the torch.
First Cardinal Rule -- "Does this increase the fun?"
Second Cardinal Rule -- "Does this make the story more interesting?"
As a DM, I would ask what I stood to gain from standing by such a ruling in that situation. Have I increased the fun for my players? Have I increased the fun for myself? Have I postponed fun right now in exchange for greater fun later? Sometimes the first cardinal rule fails but the second picks up the slack. Did the story become more interesting because of this ruling?