If you fail the class 1, but meet the requirements for the class 2 then yes they would be able to issue. Class 1 initials are substantially different to class 1 renewals, whereas class 2's are almost identical (bar things like ECG's etc) in either circumstance so it matters little whether it's a renewal or not.
A class 1 is no big deal if you're in decent health and your eyes and ears work half-decently.