If they already have their alliance's flag in-game, as in a custom flag, I would assume that this would automatically count as their sanctioned flag. In my time on CN, this has never happened before, where an alliance has voluntarily taken a flag that is already up there (any of the optional flags, rather than the custom ones) and passed on the option of uploading their own flag. It would seem that they would switch upon sanction, and use their own rightful flag. I don't believe very many alliances have given up on creating their own flag at the option of taking one that already exists (such as the flags in RL).
Normal procedure has always been that newly sanctioned alliances submit their own custom flag. I've never seen it any different than that. But assuming that a situation like yours occured... and let's say that they have chosen to stick with a flag of a RL country (or one custom flag already submitted), I believe that would make them automatically pass on the option of uploading their own optional flag to the game.
I hope that makes sense.