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If you choose to proceed with the application if the sponsor is found ineligible, the application will almost certainly be denied at the visa office, because there must be a qualifying sponsor for a family class application. However, you can then appeal the denial, provided that by the time the visa office has made the decision, whatever made the sponsor ineligible has been dealt with. On success of the appeal, the visa office would be directed to continue processing the application.
If you choose to withdraw the application, the entire package is returned to the sponsor, along with all fees paid except for the $75.00. There is no right of appeal in this situation, and the sponsor must ensure he deals with whatever made him ineligible to sponsor before re-filing the application.
Most persons choose the second option, to have their package returned to them if they are found ineligible to sponsor, rather than have the application sent on to the visa office for denial, and then proceeding with an appeal later. It's up to you.
