Assuming my DD passed the exam and didn’t qualify for the First Choice of school (i.e we were refused on distance), does she still get a place for our second choice school?
Yes, assuming all the criteria are met and places are available.
Or will we be penalised for putting it as a second choice?
No. However, you will only be offered a place at the second choice of school if the first choice is not offered. So if you change your mind about the first choice, then there are no guarantees that places will still be available at the second choice.
It's best to list the schools in the "real" order that you want them, since allocation is (or should be) done "blindly", with the highest-ranked school for which the child qualifies and meets all the criteria being offered first.