OK, the DLNA server is working fine then. To confirm, none of the files still have the orange 'enc' flag when viewed in Web-If? Can you manually decrypt a file through Web-If?
I think that the recursive auto-decrypt flag needs to be set from within the server (HDR2) Web-If page, but once this is done the open padlock/ arrow symbol will also be seen when exploring the client (HDR1) Web-If. Try unsetting the recursive auto-decrypt and then setting it again.
It is almost certainly not an issue with the software version, but I have not tried the 1.02.32/ cf 2.21 combination myself as I was already on 1.03.06 when cf 2.21 became available.
Hope you get it to work, if it still does not there might be problems with running processes etc. and this is above my pay grade to troubleshoot. You may need help from af123 or one of the other 'gurus' to fix it.
It sounds like the automatic processing is not running. Normally, when a HDR is on with recursive auto-decrypt enabled, it checks for DLNA indexed, encrypted files every 10 mins. If it finds one it runs the decryption, posting the results in the auto.log file. I don't have a deep enough knowledge of how it works to debug this process, but others do, and should be able to help. The only thing I can suggest is to update to a later version (1.03.06 or 1.03.11/ cf 2.22) and see if that fixes the problem.
auto.log is the right place. If you've set the processing level to 'Debugging information' and you still aren't seeing anything in there after ten minutes then the next thing I'd check is what happens if you run the diagnostic called auto. Go into the web interface diagnostics screen, enter auto in the box and click 'Run Diagnostic'.
If everything's working as it should, there will be no output (that will change with the next webif version but for now, expect nothing apart from errors). If there is still nothing in the auto.log then we'll have to look at running it from the command line to see what's wrong. It's also worth checking to see if your cron file has the auto line in it. Go to Diagnostics->File Editor and click on the file that ends with .../crontabs/root in the box at the bottom of the page. When the file loads, check for a line like: