Root of microSD card\sxos\titles\0100A5B00BDC6000\romfs\ff7\workingdir\data\lang-en\kernel\KERNEL.BIN
This is going to sound crazy but try changing the file to lowercase and see if it works.
At the very least, it should crash if it doesn't like it. If it doesn't crash, there's likely something else entirely going on. You should take other steps to make sure LayeredFS is working as intended.
EDIT: Also, strongly consider upgrading to latest Atmosphere. I used to use sxOS and I promise you it created more problems for me than anything else.