You can lose fat and gain muscle at the same time, but don't expect the results to be massive, comparing to if you were doing either as a standalone goal. Generally anything over 7.7 mmol leads to muscle breakdown, not sure on timings but I would assume the higher it is the quicker this would occur.
You have to focus on getting the nutrition right and managing insulin to keep you within range as much as possible. The key to fat loss and muscle development is well controlled glucose levels.
Also if you want more info, loads available on the diabeticmuscleandfitness website, facebook page and book by Phil Graham.