Lodgers creating HMO

HMO Licensing

My tenants (husband and wife) have taken in 4 lodgers without consent in a 1-2 bedroomed flat. I was unaware of this and it was not the case on my last inspection. The council have contacted me saying that they have information leading them to believe the property is in multiple occupation and asking me to apply for a HMO license. After immediately visiitng the flat, I discoeverd that they are right. I asked my tenant to give notice to the lodgers as the flat IMO is not big enough for a HMO anyway. I informed the council that I had asked the tenants to give notice to the lodgers and they have replied saying it is against the law to evict tenants while a HMO license is required, even if one is not in place and also if it is not my doing. I am confused on this matter as they are not my lodgers and I have not received any payment from them. I have not given notice to my tenants. The council are stating I have two options, apply for a HMO license or request a TEN. If I do apply for a HMO it would not be granted IMO as the flat is nowhere big enough. The council have said in the meantime they are preparing their case?? My questions are 1) should I apply for TEN or HMO? 2) have I done the wrong thing by asking my tenants to give notice to the lodgers? 3) what do the council mean by 'preparing their case'? Any advise would be gratefully received.