As far as I can tell, the first two characters are being correctly UTF-8 decoded into character 0775. You can check the character by character decoding method of your string
here.
The reason mIRC leaves in the "eth" character (compared to the above decoder) is that it is trying to preserve as much of the string as possible, even if it is not valid in a UTF-8 context.
mIRC is lenient by design when it comes to invalid UTF-8 combinations since making them strict results in other side-effects. The UTF-8 method is consistent throughout mIRC, eg. when processing servers messages, loading files, internal conversions, script processing, and so on.