If you are trying to run windows containers on your computer with Docker for Windows and stuck with "System Limitation" Error follow these steps to get rid of the following error.

ActivateLayer failed in Win32: The requested operation could not be completed due to a virtual disk system limitation. Virtual hard disk files must be uncompressed and unencrypted and must not be sparse.

This error arises when you have enabled disk compression to save space on the drive where docker folders are present.

So, Now all we need to fix this error is disable the compression and encryption (if you have already enabled) for the Docker Folders.

To do so, Right click on the Docker Folders present in Program Data folder and click on "Properties" then "Advanced" button and uncheck the compress and encryption options as shown in below image.

After this restart Docker before you continue your work. That's it. :-)