Help! I didn’t protect the tenancy deposit

Hello, We let our property to a couple with a baby in 2019, with 90% of their rent paid by the council through a housing benefit.

They immediately fell into arrears, not paying the rent at all, so the council told me they would pay the 90% direct to me. Since then the 10% payments have been erratic and they are now around £1,000 in arrears.

Mutually, we would all like them to move out. I need to do some refurbishment, and they are now overcrowded. Another child was moved in without my knowledge – not a baby – and also a large dog. It’s a 2 bed flat.

I now want to just sell the place.

They want to go somewhere bigger, and have got themselves on the list for a council property, but this could take years. I thought an eviction would help them to get bumped up the list, and I considered an s8 as they aren’t supposed to have a dog, and are in arrears, but I chose instead a s21.

I issued one, but the council have asked for the tenancy deposit receipt. [And a how to rent leaflet]. The problem is, and I’m of course in the wrong here, as an amateur, I didn’t protect the deposit.

I’ve returned it to them by bank transfer to try to draw a line under this, but they have been to citizens advice who is advising them to take me to court.

I’m not sure how this will help them find a new home, and she said she doesn’t want to go down that route. And now she’s asked me for a £20 loan.

I am now not sure what to do. They want to leave, but cannot, and they cannot afford a larger private rental.

How is this going to end? My gut says “badly”.

Any advice please?

Kate