I Googled this issue and found a question on Apple's forums, but sadly with no answers.
I was fortunate to have uploaded the same folder successfully on an iPad Pro (2018) running IOS 14.2. This proved it was certainly possible, just not on my iPad Air 2 running the same version of IOS 14.2
So same folder containing same files, both devices running the most current version of IOS- 14.2. Airdrop succeeds on the iPad Pro (1TB storage), but reports a "cancelled" error on the sending device, a Macbook Pro (2018) running OSX 10.15.7 despite the iPad Air 2 (128 GB) having the required free space. Oh, and Bluetooth was doing nothing other than Airdrop at the time of the issue.
The Airdrop was attempted again after rebooting the iPad Air 2. I also tried disabling and re-enabling the Bluetooth on both the sending and receiving devices for the sake of completeness.
Did some testing to see if file size was a limiting factor by incrementally removing chunky files and retrying the transfer.
That was it: only after I got the folder size down to 1.5 GB, did Airdrop succeed.
Then I had to airdrop the chunky files I removed to get the total folder size down to 1.5 GB and move them back into the folder on the receiving iPad Air 2. So the same volume of data was transferred in the end, proving that it wasn't down to insufficient local storage.
Since Airdrop worked with my more modern iPad Pro 2018, may only be an issue for folks using Airdrop as target devices with older legacy iPhones/iPads. Anyhoo, at least I can tell you what worked for me; YMMV. Hope this gets you out of a hole if you bump into the same problem-