You can not install m20 clutch on m42 flywheel. Slave cylinder for E36 gearbox is different, but you can make just the rod longer to prevent it falling out. In case rod is too short free travel of the clutch pedal would be very big and could be you would not be able to disengage clutch at all. Sounds from the gearbox could be because there is no oil, oil level is too low or not correct oil was used. Could you please explain what exactly happened to your gearbox? Have you checked pilot bearing? Is it correct diameter?