Thanks for all the details. I’ve tried really hard during the day to reproduce your problem, unfortunately without success. I.e. I’m successful in using AxCrypt as it’s intended without the problems you are having.
I’m surprised about your question concerning conversion – from version 2.1.1392, AxCrypt will suggest that you enable auto-conversion mode in which situation all your documents will be automatically converted to the new format as you use them.
Have you not seen this? You can also find this option under File | Options.