S8 & tenant has left

Possession - Section 8 and Section 21

Hi all, I can't seem to find my original post on this issue to continue the thread so starting a new thread. 

The tenant is in 4 months arrears and a S8 has been served, court application submitted and we are just waiting for the court date. The tenant just returned the keys and has left the property.  The property is in decent condition from what I can see. 

Do I still continue with the S8 given I now have possession of the flat but rent arrears is still outstanding? 

I had to return the deposit in the form a cheque because I failed to protect the deposit in time and this has not yet been cashed.  Could I use this to offset the rent arrears? 

If I could offset the rent arrears with the deposit, I'm thinking to perhaps cut my losses at 3 months rent loss (as much as that hurts) but this saves me court hearings, additional legal fees, potential S8 appeals.  

I know I still run the risk of the tenant pursuing legal action against me for failing to protect her deposit (up to 3x deposit amount).  

Any advice as to whether the current S8 application could cover rent arrears even through I have gained possession of the flat?  And whether it is worth pursuing this debt (about £5k)?

Thank you for your time reading about my situation.

Kind regards,

Jane