I do not know is this already known solution but at least it worked for us.

User files are not encrypted by passphrase

How do you recover an IFolder account when the user has been deleted
from NDS.

Steps taken:
1. Find the ID's for deleted user from ERROR.LOG file (normally located
in iFolder user files are stored). You should find directory what
matches the ID found in ERROR.LOG file.

2. Use empty iFolder account exp. your own and check the ID for this
account as well.

3. Copy files from deleted account directory to your own one. System
should start to upload files to iFolder client what is logged is as
"target" user.