I have found a temporary solution for this bug (until I release the next update):
instead of selecting "Add borders", select "Do not resize", and then add the following parameters to "Extra parameters" -> mencoder
-vf expand=:::::$WIDTH$/$HEIGHT$,scale=$WIDTH$:$HEIGHT$
Note: $WIDTH$ and $HEIGHT$ are "macros" - they will be replaced with the width and height you have selected, so leave them the way they are.
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