The issue is resurfacing again...

I have the same issue frequently on M1. Never had on past versions of AI.
Collapsed and docked palettes stop expanding/working. They also fully disappear if I change my Screen Mode (see pics)

This happened to me on a company account for years – the Neil earlier in the thread was also me. It seemed like it was linked to my account and my custom workspaces as it happened on my home computer too when doing company business. I am now freelance and have the same problem with my own account with standard workspaces even on the latest version of Illustrator. Sometimes also on Photoshop. As before, using the application frame makes the palettes usable again, but I hate using the application frame and shouldn't have to do it.

CC2020 on iMac Retina 5K, 2017 – Catalina

This appears to be the same issue that I and others have been suffering for a long time:

https://illustrator.uservoice.com/forums/601447-illustrator-bugs/suggestions/36118159-palettes-do-not-expand

In my case this even stops working with the application frame turned on and requires restarting the program/deleting the cache/deleting permissions which I've already done too may times

This issue is back after disappearing for a while. It was originally an InDesign problem I had for years on different Macs, OS and CC versions. It then moved over to Illustrator and, occasionally, Photoshop too. The old rule that turning the application frame on brings it back still works but I shouldn't have to work in that way to stop this happening.

CC2020 on iMac Retina 5K, 2017 – Catalina

video of the bug

Same bug. Panels won't open when in collapse mode.

Ai CC 2020
MAC 10.13.6

Resizing the window worked for me though it is a little annoying. Hopefully someone can find a fix for this soon. I can still work although I feel it slows my workflow by about 15%.

When not using the > window > application frame.
The fold out panel windows disappear.

Only when the > window > application frame is turned back on, the panels fold outs are visisible again.

This results in Illustrator being not fully functional whithout using the applicatio frame.

I used to have this problem with InDesign, which I don't get anymore. Now it has migrated to Illustrator. When I start AI the panels don't work. I have to restart 2 or more times to get them to work. I have noticed some correlation between this and the Adobe Libraries (also in the panels) not connecting. It's a real PITA. Please fix.

This had happened to me for years on InDesign and was the subject of a long-standing thread which should have been fixed in CC2019, apparently:

https://indesign.uservoice.com/forums/601180-adobe-indesign-bugs/suggestions/32519557-indesign-palettes-panels-do-not-expand-or-open-whe

It also happened in Illustrator and has since got worse, plus it now also happens in Photoshop. Ditching preferences and/or cache are a temporary solution, but not for long.

CC2019 on iMac Retina 5K, 2017 – Mojave

Illustrator 2019 on iMac Retina 5k, Late 2014 - High Sierra

No selected palettes on right hand side will expand to view contents. Requires quit and re-open to fix