Microsoft Outlook reports this error if the message was rejected by the SMTP server. This can be because of one of two reasons:
Firstly, if the Relaying settings are not configured correctly and WorkgroupMail is rejecting the senders message. Ensure that the IP address of the computer running Outlook is permitted to relay through WorkgroupMail.
Alternatively, if you believe the relay settings are correct, ensure that Outlook is not communicating with another mail server which may also be running and conflicting with Workgroupmail on the same computer. Please ensure that the IIS SMTP service is not running. Click Here for more information