PROBLEM

Running the command 'vssadmin list writers' from command prompt inside the guest virtual machine shows that the System Writer is in a failed state as below:

Writer name: 'System Writer'

Writer Id: {e8132975-6f93-4464-a53e-1050253ae220}

Writer Instance Id: {c199e334-3489-4c08-b1ed-a3ea68628794}

State: 8 Failed

Last error: Inconsistent shadow copy

The Windows Application Event Log inside the guest VM also shows the below Error Event at the time of failure:

Event ID: 2

Source: vmicvss

Level: Error

The VSS writer System Writer failed with status 8 and writer specific failure code 0x800423F0

CAUSE

The Windows System Writer is failing, thus VM Backup is unable to complete an application consistent backup of this VM due to a failure with the Windows Cryptographic Services. 

A discussion thread about this issue can be found here: 

https://social.technet.microsoft.com/Forums/windowsserver/en-US/d68f5b89-49a9-4ae5-9ad0-b2f796ef21b0/issue-with-cryptographic-services-and-backing-up-a-vm?forum=windowsbackup

SOLUTION

1. Disable "Backup (volume checkpoint)" on the running VM from the host under Integration Services
   
   
2. Run a Backup of the VM
   
   
3. Re-enable the "Backup (volume checkpoint)" on the running VM from the host under Integration Services as above
   
   
4. Reboot the VM and the next backup should be successful