I hit the same thing - I think my client just had a stale view of what version the person I was talking to was running. I did a refresh of the Favorites list on iOS and it sorted it out.
what I'm wondering: My WhatsApp tells me it can't encrypt because the other person uses an outdated version. But the other person gets told the chat is encrypted. What is the truth then? Is it still doing crypto but my UI is denying it? Or is it not encrypted and the other person has a false sense of security? That's at least a bit strange...