The judge claimed that there were several singers in the '14-24 boys' and '14-24 girls' categories who would not make the grade as solo artists, but deserved a second chance as part of male and female groups.
"I think we should give them a lifeline," Louis suggested to the other judges. "I think we should give them a chance of putting a group together."
Speaking to the contestants that he believed had potential, Walsh explained: "I think there's some talent in this room and you should think about putting a group or groups together and auditioning tomorrow with the other groups. You've only got 24 hours to do it but if you really care, if you really want it, you can do it. Don't let me down!"
Shortly afterwards, a pessimistic Simon Cowell predicted: "This experiment will fall flat in his face. It will go completely wrong, Louis rabbits on that we can't lose talent but all that's going to happen is he's going to prolong the pain. Well of course I'll have to pick up the pieces when it all goes wrong and say guess what, fairytales don't come true."
In the morning, the judges were informed that Sisi Jghalef, Phoebe Brown, Leah Lauder, Emily Biggs, Charlie Mole and Raquelle Gracie had formed a girl band called Hope, while Aaron Delahunty, Adam Chandler, Matthew Protheroe, Richard Wilkinson and Sean Rumsey had come together to form Futureproof.
The X Factor airs at 6.05pm and 8.30pm tonight on ITV1.