With the length of the TT Course a kind of logical way of doing it rather than going back to the end of the previous lap for all competitors would be to go back to the race position the rider occupied at the transponder timing point immediately prior to the location of the red flag at which said competitor was stopped.

In a similar way to Spanner's example Gary Johnson would also have been placed if the results went back to the end of Lap 5. I personally don't see how you can count in the results if you were not on your bike and racing at the time the flag came out.