This error message is returned when calling the AllowAccess method on a file or folder that has inadequate NTFS permissions. The account specified in IIS for the web application is the account used by FileManager when it attempts to grant access rights for a particular folder or file. This web application account must have "Full Control" granted in the NTFS permissions for the folder or file on which you are calling the AllowAccess method.
If you do not want to grant "Full Control" to the account specified for the web application, consider using the LogOnUser method of the FileManager object instead. For more information on this method, please see: How can I use FileManager to change the security context within my script?