On a simple level I think that armor should primarily be aesthetic except for base damage reduction, while armor is otherwise peculiar in its effects on stats that aren't necessarily effective in battle. Battle readiness should likely be a set of conditionals that are based on character growth and progression through classes, as tying them up too heavily in armor forces the player into finding weird ways to game the system with armor (or weapons, or item X dissociated with the character) rather than attempting to be creative with the character and their pecularities. See Dark Souls for a system that dissociates armor from battle effectiveness?
Really though, I think to make this as interesting as possible a DM mode might be most effective, where a DM entity could effectively make these decisions over LAN or simple online-room setup situation. In this manner, the DM and players can come to agreed upon manners in which armor functions for their playgroup. Maybe reaching for the stars a little too much with that, but it's something I think any game using an AD&D concept should strive towards at some point.
