The game not reading ARCs should only concern custom maps, but I think you try to overwrite a game archive instead?
Yes, this is true.
I think I found out what the problem could be. ARC Encryptor includes the folder which the files are packed from into the structure of the arc file. Example:
1. unpack original Sounds.arc into a folder called Test. The folders containing the sound files appear there.
2. repack the files from folder Test into a new arc file Testsounds.
3. unpack the file Testsounds into folder Test2. The file structure is now Test2/Test/folders with sound files.
I also tried to name the folder that the files are in as Sounds, this had no effect.
Am I missing something really obvious here or is the ARC Encryptor indeed at fault? How to get around this?