Windows users face this error "we couldn't update the system reserved partition" when they upgrade Windows 7 to Windows 10 or Windows 8, 8.1. This error means upgrade would fail. You don't panic because the solution of this problem is not much difficult to do.
1- You need to free the space on your System Reserved partition.
2- You can Expand the System Reserved partition using the MiniTool Wizard.
3- Last one is Turn Local Disk C into an Active partition.
Above 3 methods are easy to get rid of this error. You can get complete detail of each method to do Google.