Check for the existence of the file sshd_config (/etc/ssh/sshd_config).
Before editing the file check that path settings for sftp-server
$ locate sftp-server
/usr/libexec/openssh/sftp-server
Check for the existence of following line in sshd_config
Subsystem sftp /usr/libexec/openssh/sftp-server
Incorrect path settings to sftp server causes the above message. Once the path is set correctly, you will no longer see that error message
$ /etc/init.d/sshd restart
to restart the ssh services.
Other such error message related to the above scenario
File transfer server could not be started or it exited unexpectedly.
Exit value 0 was returned.
