WSL2 stopped working with error The system cannot find the path specified

WSL2 stopped working suddenly. If I do a new installation of linux distros. Then it throws the following error, when I click launch button for the linux distro from play store:

Installing, this may take a few minutes... 
WslRegisterDistribution failed with error: 0x80070003
Error: 0x80070003 The system cannot find the path specified.

the wsl --help command works properly. All other wsl command hangs or throws error as shown below like wsl -l command throws this error The system cannot find the path specified.

I had to reinstall the windows to fix the issue. Something got corrupted in the OS. However, before reinstalling the OS as I had lot of work stored in the WSL2, I took the backup of the entire WSL2 image, the big .vhdx file. This file is the Virtual Hard Disk of WSL2 Linux. The files inside cannot be directly explored from Windows at the moment. If one has not moved the file anywhere else, it is stored here: %LOCALAPPDATA%\Packages\<PackageFamilyName>\LocalState\ext4.vhdx

Before reinstalling the OS, after taking the backup, I wanted to test if this backup runs fine on new install of WSL2. For that, I tested it on another machine, by installing the same Ubuntu WSL2 distro and replacing the .vhdx file created with the backup file. It ran fine. So, it felt safe to do entire OS reinstall and then reinstalling WSL2 Ubuntu and finally replacing the .vhdx file with the old backup .vhdx file. So, I did loose some time. But, my data and all the applications/programs on WSL2 were intact.