When you encrypt a folder, you receive:

An error occurred applying attributes to the file:
<Drive:>\Folder\Filename - Access is denied.

The most likely cause of this error is that a file or sub-folder has the System attribute turned on.

To fix the problem, remove the system attribute, using the attrib command:

attrib \[+r|-r\] \[+a|-a\] \[+s|-s\] \[+h|-h\] \]\[path\] filename\] \[/s\[/d                              +r Sets the Read-only file attribute.                               -r Clears the Read-only file attribute.                               +a Sets the Archive file attribute.                               -a Clears the Archive file attribute.                               +s Sets the System file attribute.                               -s Clears the System file attribute.                               +h Sets the Hidden file attribute.                               -h Clears the Hidden file attribute.                               \[\[drive:\]\[path\] filename\] Specifies the location and name of the directory, file,                               or set of files you want to process. You can use wildcard characters (? and *)                                in the filename parameter to display or to change the attributes for a group of files.                              /s Processes matching files in the current directory and all of its subdirectories.                               /d Processes directories.
NOTE: Never encrypt files or sub-folders in %SystemRoot%. Doing so will likely prevent your installation from restarting.