Target mailbox does not allow inferior mailboxes
From MozillaZine Knowledge Base
If you try to delete a folder you may get a "Target mailbox doesn't allow inferior mailboxes" error message. This is because its trying to move a folder with messages in it to the Trash folder on a IMAP server that doesn't support the idea that folders can contain both messages and a folder. This problem usually occurs with UW and Dovecot IMAP servers. It will never occur with a Courier, Cyrus, Gmail or Microsoft Exchange IMAP server.
Uncheck Tools -> Account Settings -> Server Settings -> Advanced -> “Server supports folders that contain sub-folders and messages” and try again.
If that doesn't work go to Tools -> Account Settings -> Server Settings -> “When I delete a message” and set it to "Remove it immediately". Delete the folder, empty the trash, compact the folders, and then reset “When I delete a message” to whatever you want.
This problem occurs because Thunderbird usually can't figure out what type of IMAP server you're using when it creates the account and the mail server is only required to respond with what version of IMAP it supports when it is asked what it is capable of.