Thanks for your reply Alex.
When re-encrypting a sharepoint folder you have to set Check out to No otherwise the encryption fails and we still have the problem.
I suspect this is a limitation of the Netshare/SHarepoint interface. When you look at a file using WebDav e.g. in explorer view, you can only see the top version and as it's the WebDAV view that Netshare uses, earlier versions will never be re-encrypted.
The problem is a long term one. As people leave the project, fewer and fewer people can access the earlier versions of documents and it is likely that at some point there will be no one left who can access earlier versions.
Dave