DPS - tenant threat to pursue through court

Tenancy Deposits

My (three) tenants moved out 3 weeks ago. There were on a 12 month AST but ended up staying around 18 months under a periodic tenancy beyond the 12 months. There were a number of minor issues with the house either due to damage/mould/missing halogen bulbs/cracked floor tiles/damaged shower etc that was left unrepaired and not brought to my attention, or things that they agreed to do but didn’t end up doing before moving out (such as repairing holes in wall where they had hung things up).
One of the three tenants agreed to forfeit part of her deposit as a result of this.
I returned the majority of their deposit but ended up deducting around 25% of the overall deposit to cover repairs and fix minor damage.

They paid £1000 deposit in Aug 2009, and now 2 weeks after having received the balance of their deposit back (around £750), the tenants are now threatening to take me to the small claims court because their deposit was not protected. I admit I made an error and didn’t protect their deposit, but I have actually retuned the major portion of their deposit back to them and made some minor deductions.

If it goes to court, how much can the judge ask me to pay back? (i.e. three times the full deposit, or just three times the amount I have witheld).
Should I get a signed letter from the tenants agreeing not to go to court if I return their full deposit (and just take the hit myself for the damage to the property etc)?
Should I fight my corner in court?
The tenants have given me 7 days notice to return,but this notice was via email and not a letter through the post.