Setting off a debt is a technique used in business relationships to replace gross positions with net positions, i.e. to eliminate the need for back and forth transactions where both parties owe money to each other by simply calculating the net amount owed and to whom. Setting off is therefore achieved by subtracting the smaller debt from the larger. This is advantageous for both parties as it creates simplicity, reduces fees associated with transfer, and reduces credit exposure.
Under section 553C of the Corporations Act, and section 86 of the Bankruptcy Act, where reciprocal indebtedness exists, and the debtor is either an insolvent company or a bankrupt, the creditor is entitled to set off any sum they owe to the insolvent or bankrupt against the debt which they are owed by the insolvent or bankrupt. This ensures fairness in the process.
There also exists a doctrine of equitable set off, which may be engaged as a remedy in equity whether there exists a claim and a cross-claim between parties, and an injustice would arise from considering one without the other.