Ever since then, our school refused to submit test paperwork and the like until all debts had been cleared.
Be careful with that:
CAR 5.42 Flight tests: CASA to be notified
(3)An approved testing officer must:
(c) send the flight test report form to CASA: (i) if the test is passed—within 14 days after the day of the test; or
(ii) if the test is failed—within 90 days after the day of the test.
(3C) An offence against subregulation (2), (3) or (3B) is an offence of strict liability.
There might actually be more justification for a student to withhold payment until all legal requirements for training records etc. are met than there is for a school to withhold a logbook which the student is required by law to keep - especially if the student is paying for a "course" rather than flight by flight.
Non-payment is a commercial problem all businesses face - usually, without keeping property as security.
Possession might be 9/10 of the law, but that other 1/10 can be problematic...