The fallback works only if the server does not recognize the "SFTP" subsystem. Your server does, but it's not configured correctly.

I am trying to connect to a SliTaz live system and after the welcome banner it just goes back to the session selection screen without any message. I have SFTP selected and SCP fallback is enabled. SliTaz doesn't support SFTP so I was expecting it to fallback to SCP. Using SCP explicitly works and I am using SCP successfully on the system via a Java SSH library.

I am using WinSCP 5.9.1 and tested with SliTaz version 3, 4 and the 5 rolling. I didn't find anything to generate

On a side note. When using SCP explicitly it still doesn't work on SliTaz 3, but that is caused by it using a busybox and "ls" not supporting the "--full-time" option causing the "ls -la --full-time" call for the file listing to fail.

I also wasn't able to attach a file (I am using Edge) so I am pasting part of the log here:

. 2016-08-24 13:41:47.277 Using SFTP protocol.
. 2016-08-24 13:41:47.277 Doing startup conversation with host.
. 2016-08-24 13:41:47.277 Session upkeep
. 2016-08-24 13:41:47.277 Looking for network events
. 2016-08-24 13:41:47.277 Detected network event
. 2016-08-24 13:41:47.277 Enumerating network events for socket 1496
. 2016-08-24 13:41:47.277 Enumerated 1 network events making 1 cumulative events for socket 1496
. 2016-08-24 13:41:47.277 Handling network read event on socket 1496 with error 0
. 2016-08-24 13:41:47.277 Received 4 bytes (1)
. 2016-08-24 13:41:47.277 Received 32 bytes (1)
. 2016-08-24 13:41:47.277 Received 1 bytes (1)
! 2016-08-24 13:41:47.277 sh: /usr/sbin/sftp-server: not found
. 2016-08-24 13:41:47.277 Server sent command exit status 127
. 2016-08-24 13:41:47.277 Selecting events 0 for socket 1496
. 2016-08-24 13:41:47.277 Disconnected: All channels closed
* 2016-08-24 13:41:47.399 (EFatal)