So far, this problem only happened when someone has deleted an IMAP mail directory off the mail server directly. The unfortunate thing was that he was still subscribed, and that folder was still being shown in the drop-down folder lists. The fix was to unsubscribe from that folder. If you are unable to do it in SquirrelMail, try editing ~/.mailboxlist (or similar). One would hope that if you are able to delete the directory, you should be able to find the subscription list and alter that too.
For delete all these ghost folders, you have to look for files like username.sub and edit those files. Then restart all the services of your mailserver and you're done!!
(I've found those files in /var/lib/cyrus/first-user-letter/)