What happens in the attempted diazotisation of 1,2-diaminobenzene?
Your suspicion that a ring forms is a good one. You can convert one of the amine groups to the diazonium chloride:



However, in addition to substitution reactions by loss of $\ce{N2}$, diazonium compounds will react with nucleophiles at the terminal nitrogen atom. The best known examples of this behavior are diazo couplings, where the nucleophile is an activated arene. However, other nucleophiles, especially intramolecular nucleophiles, can attack diazonium cations. The other amine is poised to do this: