A Smart Folder or Sub folder only get to an Ended State (ok or notok) when all jobs in the folder have ended.
I.e. if one job has ended notok, but there are still jobs in waiting state, so the folder itself is still in Executing State (even though the color changes to red, that is for display purpose to highlight in the tree view where the failed job is located) and therefore the Folder's ON NOTOK will not get triggered.
I think the only option you have, when folder has sequential job flows, is to have the DO NOTOK in each job.
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"When Folder Ended Not OK" kicks in only after all jobs in the folder are completed (whether OK or not). If you want to trigger your 2nd sub-folder on any job failure, you will need to either define add condition for each and every job or to use BIM to monitor the job flow. BIM can add a condition based on "job failure on service path". You have to make sure that all the necessary jobs are in the service path. It may be an overkill to use BIM just for this purpose but this is the only solution that I can think of.
Thank you both for responding.
It is a shame that there isnt an option to detect and report on a failure within a folder (At folder level), if it is going to prevent the folder from completing.
Looks like i will be adding quite a few 'ON DO' actions to jobs today :-/