I'm not qualified to give legal advice since I am not a lawyer so check with someone qualified to answer your set aside question. But it sounds pretty weak since you offered to settle once you got the claim so you did know about the action.
RE: letter, yes the collection act says a letter must be sent, and they probably did, but it doesnt need to be registered so its word against word in court. The collection agency will have proof in their system that they attempted to mail it...
Let me guess the collection agency is CRS?