Had this issue recently on some AIX servers.
Check the file /etc/ssh/sshd_config for an entry similar to:
Subsystem sftp /usr/sbin/sftp-server
This defines the binary to be used for SFTP connections. Ensure the path, filename and permissions are correct.
If you amend it, restart ssh with:
stopsrc -s sshd;startsrc -s sshd
This will not affect existing ssh connections.
