Sorry to hear about this, I'd definitely appeal it, with your tutor's support you will have a chance. As far as I know, student finance provides funding for the course + 1 year (so, for a typical three year degree, you could drop out of one in the first year and still be fully funded for a second degree, but after 2 years of funding, they would ask you to pay for the first year of a second three-year degree). Would you have to start year 3 during your appeal? If you were to start year 3 (even if you didn't complete it) this might add another year to your count - I'd check this with student finance before registering for 3rd year if you do have to do so during your appeal.
Have the university given a reason why they have taken until now to ask you to withdraw, when the module in question was obviously failed more than a year ago? Surely it shouldn't take that long to tell you this, it seems absurd that they're messing you about now and have wasted more than a year of your time.