Late payment is one of the quickest ways for a profitable business to run out of cash. You have done the work, issued the invoice and passed the due date but the money is not in your account and the polite follow-ups have stopped working.
At that point most Victorian business owners reach for a letter of demand.
That is the right instinct, but the timing and the wording matter more than people realise. Send it too early and you can damage a commercial relationship you would rather keep. Send the wrong version to the wrong entity and you weaken your position, or hand the other side a reason to dispute the debt.
This guide sets out the practical steps for recovering an unpaid invoice in Victoria: what to check before you send a letter of demand, what belongs in it and what your realistic options are if it is ignored.
Key takeaways
- Check the limitation period before anything else. In Victoria you generally have six years from the date the debt became payable to start proceedings.
- Confirm exactly who owes you the money – a company, sole trader, partnership or trust (through a trustee).
- A letter of demand creates a written record supporting your obligation to try to resolve the dispute, and it often prompts payment on its own.
- Never issue a statutory demand for a debt that is genuinely disputed. It can be set aside with costs awarded against you and the test for a set aside is a low bar to meet.
What is a letter of demand?
A letter of demand is a letter on legal letterhead (normally) telling a debtor how much they owe, why they owe it, when they must pay and what you will do if they do not.
A letter of demand does three jobs at once. It puts the debtor on notice. It creates a documented record of your attempt to resolve the matter and demonstrates that you are serious as you have gone to the trouble and expense of engaging lawyers. Finally, it tests whether you are dealing with a debtor who cannot pay, will not pay, or genuinely disputes the invoice – three situations that may call for very different responses.
It is not the same as a statutory demand. A statutory demand is a formal notice issued under the Corporations Act 2001 (Cth), available only against companies, and it carries consequences a letter of demand does not.
What should you check before you send a letter of demand?
Five checks will tell you whether a letter of demand is the right move, and what it should say.
1. Is the debt actually due and payable?
Go back to the source documents: the quote, the contract, the purchase order, your terms of trade and the invoice itself. Confirm that the work was delivered, the invoice was properly rendered, and the payment date has passed. If your terms of trade were never provided to the customer or accepted, you may not be able to rely on them for the purposes of a due date but also on the topic of interest and costs more broadly.
2. Who is the debtor?
Take a moment to identify who actually owes the money.
This is the check most often skipped, and the one that causes the most damage.
A debtor is typically a person, company, trust or partnership. There are other options but it is usually one of these four.
A business name is not a legal entity. If you send a demand to “Smith Building Services” and that is a registered business name of a company, you have addressed the wrong party.
Search the ASIC registers to confirm the entity, its ACN, its registered office and whether it is under external administration before you send anything.
3. Is the debt genuinely disputed?
If the customer has complained about the quality of the work, claimed a set-off or raised a variation dispute, you are no longer in straightforward debt recovery territory.
A genuine dispute usually rules out a statutory demand and changes how a court will view your conduct (assuming the allegations being made are correct and provable).
It does not mean you cannot recover – it means the path is different.
4. How old is the debt?
In Victoria, an action founded on a simple contract must generally be brought within six years of the date the cause of action accrued. For an unpaid invoice, that is usually the date payment fell due. Once the period expires, the debt is not extinguished but your ability to recover it might have ended.
5. Can you claim interest and recovery costs?
If your terms of trade provide for interest and recovery costs and those terms were properly incorporated into the contract, you can generally claim them.
You are of course at liberty to make such demands but you need to be very clear on whether there is a basis for making such a demand. Finally, be aware that you cannot say you will proceed to Court for non-payment of costs if there is no contractual obligation to pay.
What should a letter of demand include?
A demand that is vague or overstated invites a dispute. A demand that is precise and restrained is far more likely to be paid. At minimum it should set out:
- The correct legal name of the debtor entity (along with any ACN in the case of a company).
- The precise amount claimed, itemised by invoice number and date.
- The basis of the debt – the contract, agreement or terms of trade under which the work was supplied.
- Any interest and recovery costs claimed, with the contractual or statutory basis for them.
- A clear payment deadline and payment details.
- What you will do if payment is not received by that date.
That final point deserves care. Do not threaten a step you are not prepared to take, and do not threaten a step that is not legally available to you.
What happens after you send a letter of demand?
There is a recognised escalation path in Victoria. Each step costs more and takes longer than the one before it, so the point is to resolve the debt as early in the sequence as you can.
Step 1: payment, negotiation or silence
Most demands produce one of three outcomes. The debtor pays the demand (or a part of it by arrangement), the debtor disputes some or all of the debt or there is no reply.
If a payment arrangement is proposed, be sure to document it properly. A poorly drafted arrangement can inadvertently restart or extend arguments about what is owed, and an undocumented one gives you nothing to enforce. If the debtor disputes the debt in response, treat that seriously – it shapes every option that follows.
Step 2: starting recovery proceedings
Where a debt is disputed, or the debtor simply will not engage, court proceedings may be the only realistic option. In Victoria, the Magistrates’ Court hears civil claims up to $100,000. Claims above that go to the County Court or the Supreme Court.
VCAT also has jurisdiction to hear and determine consumer law claims which often include debt related matters.
If the debtor does not respond to the complaint, you may be able to obtain default judgment relatively quickly.
If the claim is defended, expect a longer process involving pleadings, a pre-hearing conference and, potentially, a contested trial. If the matter goes the full journey, it will end with judgment and Orders.
What are the most common mistakes when it comes to a letter of demand?
These can include the following:
- Addressing the demand to a business name or trading name rather than the legal entity.
- Issuing a statutory demand for a debt the debtor which is genuinely disputed.
- Waiting too long and discovering the six year limitation period has expired.
- Claiming interest or recovery costs without a proper basis.
- Threatening steps you have no intention of taking, which teaches the debtor that your deadlines are negotiable and you may not intend to chase a debt.
- Winning a judgment without first checking whether the debtor has anything worth enforcing against.
- Accepting an informal payment arrangement that is never documented.
Frequently asked questions
How long do I have to recover an unpaid invoice in Victoria?
Generally six years from the date the debt became payable. In some circumstances the period can restart, for example where the debtor acknowledges the debt in writing or makes a part payment. Get advice before assuming an older debt is unrecoverable.
Is a letter of demand the same as a statutory demand?
No. A letter of demand is a letterA aA statutory demand is a formal notice under the Corporations Act 2001 (Cth), available only against companies.Ignoring one creates a presumption of insolvency.
Can I charge interest on an overdue invoice?
Yes, if your terms of trade provide for it and those terms formed part of the contract. If they do not, interest may still be available under Victorian legislation. The rate and the basis both need to be correct, because an overstated claim can undermine your position.
What happens if the debtor ignores my letter of demand?
Your next step depends on who the debtor is and whether the debt is disputed. Against a company, a statutory demand may be available. Otherwise, court proceedings in the Magistrates’ Court or County Court are the usual path, followed by enforcement if judgment is obtained.
Will I get my legal costs back?
Yes. They can be demanded or obtained by Court Order.
When should I seek legal advice?
Not every unpaid invoice needs a lawyer. A first reminder and a firm follow-up are things most businesses can and should handle themselves.
It is worth getting advice when the amount is commercially significant, when the debtor disputes the work or claims a set-off, when you are considering a statutory demand, when the debtor may be insolvent, when the debt is approaching six years old or when you are dealing with a payment claim under the security of payment legislation. Those are the points where the wrong step is expensive and difficult to undo.
How can MST Lawyers help?
Our Disputes and Litigation lawyers acts for Victorian businesses recovering commercial debts, from a single significant invoice to ongoing recovery across a debtor ledger.
We can review or prepare a letter of demand so it is accurate, properly directed and carries real weight; advise on whether a statutory demand is available and appropriate; assess the debtor’s position before you commit to litigation; run Court proceedings and enforce a judgment once you have one.
If you are owed money and the follow-ups have stopped working, contact our Disputes and Litigation team to discuss your options before you send anything.
Reviewed by Mark Skermer, Principal, MST Lawyers.
This article provides general information only and is not legal advice. You should obtain advice specific to your circumstances before acting.
Corporations Act 2001 (Cth) – legislation.gov.au
Limitation of Actions Act 1958 (Vic) – legislation.vic.gov.au
ASIC company register – asic.gov.au/online-services/search-asic-s-registers
