Some people seem to be getting confused with the protected deposit and the landlords right to take you to court, they are separate things.
The protected deposit is there to cover minor issues up to the value of the deposit and is protected in such a way that there is a level of mediation/regulation on how much, if any the landlord can retain - in the case of the deposit scheme some items are depreciated in value, ie carpets.
On the other hand, if the landlord feels that extensive damage has been caused (not saying it has of course) he can quite legally persue you via the courts for what he feels he is due, its then up to the court to decide.
As the landlord has submitted the court papers, it is out of you hands, it will either proceed to court, or they may pull out last minute if you don't approach them to settle.
It doesn't have to cost them much, the court fee is £455 and they can simply represent themselves, it's not a complicated matter.
If it goes to court, do turn up, if you don't it is far more likely they will win, if they do win on the day offer a payment plan as suggested by a pp.
Did you get permission to re-decorate in writing?, this is something they could (and I say could) win on, claiming your DHs decorating to be substandard, non authorised and needing re-doing.
I would get a solicitors advice as well if you can afford it.
They sound awful from your description of events, I wish you well, stay calm, it will follow a slow due process and thats that!