I was running SQL Server inside a docker container for a while, everything worked smoothly.

But one day all of a sudden, when I tried to start that container, it started giving me this error:

PalInstanceId: Unable to read instance id from file

As I had changed nothing in docker, I had no clue why this error started popping up. Below is my docker-compose section for creating the Sql Server Docker instance:

version: "3.2"
services:
    mssql:
        container_name: skillsdb_mssql
        image: mcr.microsoft.com/mssql/server:2022-latest
        environment:
          ACCEPT_EULA: 'Y'
          SA_PASSWORD: "YourPassword"
        ports:
          - "1433:1433"
        volumes:
          - mssql_data:/var/opt/mssql

volumes:
  mssql_data:

After a lot of troubleshooting, I found the problem. One of the cause of this error is when any data files in your Docker volumes get corrupted. So you simply have to delete the volume that this Sql Server docker instance is using, in the above case, its mssql_data:

docker volume rm mssql_data

This helped me get rid of the above error.