I would hate to state categorically one way or the other but...
I *think* that if you have a humans playing most (preferably all) of the majors then you would be better off all upgrading to 1.2 and continuing from there. You'll be missing out on events, AI files, etc., but the overall stability should be better.
I would strongly recommend that you set a game rule for a temporary truce while you all sort out your respective nations since some stuff is likely to be altered quite a bit and may take a week (in-game week) or two to get it all ironed out.
Still...I'd give some very serious thought to a restart with the 1938 scenario.
I hope that helps - and remember that I'm primarily guessing that you won't find the changes a gamebreaker when applied to your situation.
P.S. If you have AI Russia, Germany or UK I'd stick with 1.1 and do a dual install.